Annual Report
13
www.zcl.com
CONTENTS
______________________________________________
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Corporate Information
2
3
26
58
Message to Shareholders
Overall, I look back at 2013 as a successful year for ZCL. We posted records for net income of $14.4
million, EBITDA of $25.7 million, and fully diluted earnings per share of $0.49. In addition, we achieved a
Return on Capital Employed of 29%, up from just 12% as recently as 2011. However, the results of the
fourth quarter of 2013 were weaker compared to the same quarter of 2012, due to significantly lower
revenues from the Aboveground operating segment. Although we have made improvements in
operating efficiencies in many areas of our business, there is still room for improvement. The sequential
drop we saw in fourth quarter margins of 2013 was the result of short term volume, customer mix and
product mix issues.
After growing our revenues by 34% in 2012, we saw a 5% decline in revenues in 2013. Short term
factors in our Corrosion Products group caused this revenue decline. We did see growth in both our
Petroleum and Water Products groups in 2013, and we expect that growth to continue in 2014. The
signals we are getting from customers in our Petroleum Products markets indicate that 2014 should be
another good year as both new construction and accelerating tank replacement programs will drive that
growth. We also expect continued growth in our Water Products group, as both a gradual increase in
overall North American construction activity and the increasing severity of water shortages in large parts
of the markets we serve, will drive the growth.
While our Underground segment is poised for growth in 2014, short-term market uncertainty and lack of
visibility in our Aboveground segment means achieving 2014 growth in Corrosion Products is not
assured. Over the long term, we expect that the oil and gas energy renaissance that is occurring
throughout North America will continue to transform both the energy markets and the industrial
chemical markets that we serve, leading to growth in revenues from each of them. Our Industrial
Corrosion customers’ capital investment spending cycles appear to be well primed for expansion as
cheap and abundant natural gas drives the re-shoring and expansion of North America’s industrial
chemical manufacturing base.
We will purposefully direct our efforts towards achieving profitable revenue growth in 2014 and
beyond.
ZCL exits 2013 with a very strong balance sheet with working capital of $47.8 million and a net cash
position of $15.1 million, both of which give ZCL great financial flexibility as we search out the strategic
growth opportunities before us. Given our financial strength and confidence in our future cash flow
generating capabilities, I am pleased to report the Board declared a 17% increase in the quarterly
dividend to $0.035 per share.
I can assure you, that while we take great pride in the improvements we have made in ZCL’s financial
performance, the ZCL team is not satisfied. We believe in the concept of continuous improvement and
we are resolute in our commitment to the journey we are on. While the pace of profitability
improvement we have seen over the past three years, which includes an 11 percentage point
improvement in gross margin and an almost 14 percentage point improvement in EBITDA margin, will
moderate in the coming quarters, we think that future incremental improvements are still possible.
I want to thank our shareholders for their continued support of ZCL. I look forward to our next
correspondence with shareholders that will occur in early May 2014 when we release our first quarter
2014 results. I also want to remind shareholders of our upcoming Annual General Meeting to be held in
Edmonton on Friday, May 9, 2014. I want to extend an invitation to all shareholders to attend this
meeting and I look forward to seeing many of you at that time.
Ron Bachmeier
2 Management’s Discussion and Analysis
Management’s Discussion and Analysis
INTRODUCTION
Inc.’s
(“ZCL” or
ZCL Composites
the "Company")
Management's Discussion and Analysis ("MD&A") of the
results of operations, cash flows and financial position as
at December 31, 2013, should be read in conjunction with
the Company’s audited consolidated financial statements
and related notes for the year ended December 31, 2013.
SEDAR
The
statements
site
at www.sedar.com or
at www.zcl.com.
the Company’s Web
available
are
on
The Company’s audited consolidated financial statements
are prepared in accordance with International Financial
the
Reporting Standards
International Accounting Standards Board. All figures
presented in this MD&A are in Canadian dollars unless
otherwise specified.
(“IFRS”) as
issued by
CORPORATE PROFILE
ZCL is North America’s largest manufacturer and supplier
of environmentally friendly fibreglass reinforced plastic
(“FRP”) underground storage tanks. We also provide
custom engineered aboveground FRP and dual-laminate
composite storage tanks, piping and lining systems, and
related products and accessories where corrosion
resistance is a high priority. ZCL has six plants in Canada,
six in the US and one in The Netherlands.
The Company has three product groups, Petroleum
Products, Water Products and Corrosion Products, and
continues to leverage off the strong brand identities of
ZCL, Xerxes, Parabeam, ZCL Dualam and ZCL Troy.
The Petroleum and Water Products groups are
components of the Underground Fluid Containment
(“Underground”) operating segment, use a similar
production process, and use the brand identities of ZCL,
Xerxes, and Parabeam. Corrosion Products are included in
the Aboveground Fluid Containment (“Aboveground”)
operating segment and use the brand identities of ZCL
Corrosion, ZCL Dualam and ZCL Troy.
Forward-Looking Statements
This MD&A contains forward-looking information based
on certain expectations, projections and assumptions.
This information is subject to a number of risks and
uncertainties, many of which are beyond the Company’s
control. Users of this information are cautioned that
actual results may differ materially. For additional
information refer to the “Advisory Regarding Forward-
Looking Statements” section later in this MD&A.
Non-IFRS Measures
The Company uses both IFRS and non-IFRS measures to
make strategic decisions and to set targets. Gross profit,
gross margin, adjusted EBITDA, funds from continuing
operations, working capital, return on capital employed,
net debt, net cash and backlog are non-IFRS measures
that are used by the Company. They do not have a
standardized meaning prescribed by IFRS and may not be
comparable to similar measures used by other companies.
information refer to the "Non-IFRS
For additional
Measures" section later in this MD&A.
This MD&A is dated as of March 7, 2014.
Underground Fluid Containment
Petroleum Products
ZCL is the leading provider of underground fuel storage
tanks for the retail service station market in both Canada
and the US. ZCL manufactures both single wall, and for
In
secondary containment, double wall FRP tanks.
addition, ZCL operates internationally through technology
licensing agreements.
As an alternative to the replacement of underground
storage tanks, ZCL has developed the Phoenix System®.
This unique Underwriters Laboratories
(“UL”) and
Underwriters Laboratories of Canada (“ULC”) listed tank
system allows in-situ upgrades of steel or fibreglass tanks
to either a secondary containment system or a fully self-
supporting double wall tank. It is an effective alternative
to tank replacement.
A key component of both ZCL’s double wall tank and the
Phoenix System® is Parabeam®, a three-dimensional glass
fabric that is manufactured and distributed from the
Company’s facility in The Netherlands.
3
Management's Discussion and Analysis
Water Products
ZCL’s watertight and easily installed fibreglass tanks are
an ideal alternative to the concrete products that have
traditionally dominated this market.
Applications for ZCL’s underground FRP storage tanks in
the Water Products market include onsite wastewater
treatment systems, fire protection systems, potable water
storage, rainwater collection, large diameter wet wells
and lift stations, grease interceptors and storm water
retention systems.
OVERALL PERFORMANCE & OUTLOOK
Overall, 2013 was a successful year for ZCL. We posted
records for net income of $14.4 million, adjusted EBITDA
of $25.6 million, and fully diluted earnings per share of
$0.49. In addition, we achieved a return on capital
employed (see the “Non-IFRS Measures” section later in
this MD&A) of 29%, up from just 12% as recently as 2011.
Financial Results
Revenue
Revenue for the year ended December 31, 2013 was
$161.7 million, down $8.7 million or 5% from $170.4
million for the year ended December 31, 2012. The
Underground operating segment grew 6% and Petroleum
Products achieved record annual revenues. The overall
decrease in revenue was attributable to the Aboveground
operating segment.
Gross Profit
Gross profit for the year ended December 31, 2013 was
$33.5 million, up $3.6 million or 12% from $29.9 million a
year earlier. Gross margin increased to 21% of revenue
for 2013, up from 18% a year earlier, with the increase
attributed to process
in operations,
in the Underground
changes
segment, increased sales volume without a corresponding
increase in the fixed cost base.
in customer mix, and
improvements
Aboveground Fluid Containment
Corrosion Products
ZCL manufactures custom designed and engineered
fibreglass tanks, piping and related products and
accessories for industrial projects where corrosion and
abrasion resistance is a high priority. ZCL’s capabilities
installation of custom
include the manufacture and
engineered FRP and dual-laminate composite products for
use in the power generation, chemical, chloralkali, pulp
and paper, mining and Oil Sands industries.
Net Income
Net income for the year ended December 31, 2013 was
$14.4 million, up $0.9 million or 7% from $13.5 million a
year earlier. Net income per diluted share for 2013 was
$0.49, up $0.03 from $0.46 per diluted share a year
earlier. Excluding a 2012 redemption of preferred shares
and settlement of financial claims, which provided
earnings per share of $0.05, the earnings per share
increase over 2012 would have been $0.07 or 17%.
Net Cash
As at December 31, 2013, ZCL had a net cash and cash
equivalents
(“net cash”) balance of $15.1 million
compared to $3.7 million as at September 30, 2013 and
$0.1 million as at December 31, 2012.
Dividends
Given our financial strength and confidence in our future
cash flow generating capabilities, we are pleased to
report the Board declared a 17% increase in the quarterly
dividend to $0.035 per share for the fourth quarter of
2013, up from $0.03 per share previously. The dividend
will be paid on April 15, 2014, to the shareholders of
record as of March 31, 2014.
4
2013 Report Card and Outlook
2013 Report Card
For 2013, our focus was on profitable growth through our
“simplify to grow” strategy. The five key aspects of ZCL’s
2013 strategic plan were as follows:
•
Focus on quality:
o
Improve our quality control processes through
lean initiatives in order to reduce rework and
disruptions in the production flow.
Results: Achieved improvements with in-plant quality
control pass rates, on-time delivery and cosmetic
quality.
•
Improve profitability:
o
Exceed the 13% adjusted EBITDA achieved in 2012
and improve gross margins as a percentage of
revenue by 2% from 18% in 2012.
Results: Exceeded both targets with adjusted EBITDA of
16% of revenue and gross margins of 21%.
• Meet deliveries and reduce lead times:
o Meet 100% of the customer delivery requirements
and shorten lead times by 25% in order to improve
the flexibility of the plants and responsiveness to
customers.
Results: Achieved the goal to shorten underground
storage tank lead times by 25%.
Expand employee integration:
•
o Refine employee compensation package to further
align employee goals and objectives with ZCL’s
strategic priorities and shareholder interests.
Results:
improvements through refined
compensation and performance management systems.
Achieved
•
Continued focus on safety:
o Continuation of the standardization of our safety
policies, procedures and metrics.
Results: Achieved
metrics.
improvement
in company safety
Management's Discussion and Analysis
Backlog
($millions)
2013
2012
% change
December 31
38.9
35.2
11%
As of December 31, 2013, backlog was $38.9 million, up
$3.7 million or 11% from $35.2 million a year earlier. The
overall increase resulted from growth in the Underground
backlog, which was partially offset by a decline in the
Aboveground backlog compared to December of 2012. In
addition, December 2013 backlog included $1.4 million on
the conversion of US dollar backlog to Canadian dollars
for reporting purposes, primarily in the Underground
segment.
The Aboveground backlog decline reflects continued
softness in new order activity in the Oil Sands, industrial
chemicals and power generation markets.
In the Underground segment, compared to 2012, the
Canadian operations backlog was up $5.5 million due to a
very successful pre-order program. The US operations
backlog was up 12% including a 7% positive impact due to
foreign exchange conversion of US dollar backlog to
Canadian dollars for reporting purposes.
Total backlog of $38.9 million increased by $1.6 million or
4% over the $37.3 million backlog as at September 30,
2013. The increase is primarily attributable to the
Aboveground operating segment, with the Corrosion
Products backlog increasing by 30%. In Underground,
Water Products backlog
increased by 28% over
September 2013.
The Petroleum Products group backlog decreased by 5%
over September 2013, primarily due to the traditional
seasonality of the Underground business.
Conversion of backlog to revenue for the Underground
segment is generally realized in the following quarter. For
Aboveground, the conversion of backlog to revenue is less
predictable because of variable timelines for design,
engineering and production.
Backlog is a non-IFRS measure and does not have a
standardized meaning prescribed by IFRS and may not be
comparable to similar measures used by other companies.
For additional
information refer to the “Non-IFRS
measures” section later in this MD&A.
5
Management's Discussion and Analysis
2014 Strategic Priorities & Outlook
Our outlook by product group is as follows:
For 2014, our strategic priorities are now more directly
focused on growth while maintaining profitability under
improvement umbrella. While our
the continuous
Underground segment is poised for growth, short term
in our
market uncertainty and
Aboveground segment means achieving growth
in
Corrosion Products is not assured.
lack of visibility
The four key aspects of the 2014 strategic plan include:
•
Revenue growth:
o
Targeting and engaging expanded sales channels
to strategically penetrate existing and emerging
markets.
•
Increase profitability:
o Continuous
improvement
in operations by
increased use of automation, expanded use of KPIs
and
leveraging our supply chain to optimize
materials management.
•
•
Invest in human capital:
o Continue to use ZCL employee branding to make
ZCL the employer of choice.
Continued focus on safety:
o
Implement behavioral change to drive safety
improvements.
Our operations group plans to
increase the capital
investment in 2014 in order to further progress lean
initiatives within our facilities. This will include increasing
the capital budget for 2014 for process improvement
projects in addition to the standard maintenance capital
requirements. ZCL’s maintenance capital requirements
are historically between $3 million to $5 million annually.
For 2014, ZCL’s capital budget is planned to be at the
upper end of that range in order to upgrade certain of our
existing facilities and equipment with the intent to further
improve lead times and process flow.
Petroleum Products
Petroleum Products is our largest revenue group and the
most mature market. Backlog is strong and management
expects to see moderate growth in this product group.
The signals we are getting from customers
in our
Petroleum Products markets indicate that 2014 should be
another good year as both new construction and
accelerating tank replacement programs will drive that
growth.
Water Products
Our Water Products group also appears to be poised for
continued growth, as Water products backlog has
continued to increase. A gradual increase in overall North
American construction activity and the increasing severity
of water shortages in large parts of the markets we serve
should drive this growth. This market has been affected
by a reduction in infrastructure spending at all levels of
government as economic stimulus programs were wound
down. However, as the overall economy continues to
strengthen, government funding will be a less significant
factor in driving growth for Water Products.
Corrosion Products
We anticipate lower revenues in the first half of 2014, as
evidenced by the low backlog level at December 31, 2013
compared with December 31, 2012. The outlook for the
second half of 2014 is uncertain at this time but over the
long term we expect that the oil and gas energy
renaissance that is occurring throughout North America
will continue to transform both the energy markets and
the industrial chemical markets that we serve, leading to
growth in revenues from each of them. Our Industrial
Corrosion customers’ capital investment cycles appear to
be well primed for expansion as cheap and abundant
natural gas drives the re-shoring and expansion of North
America’s industrial chemical manufacturing base.
Corrosion Products continues to represent our largest
long term opportunity for growth. Key factors influencing
this positive longer term outlook are the externally
forecasted future capital spending in the Oil Sands market
and the continued recovery in the power generation and
industrial chemical markets, driven by low natural gas
pricing.
6
Management's Discussion and Analysis
SELECTED FINANCIAL INFORMATION
(in thousands of dollars,
except per share amounts)
Underground Fluid Containment Revenue
Aboveground Fluid Containment Revenue
Total revenue
Gross profit (note 1)
Gross margin (note 1)
General and administration
Foreign exchange (gain) loss
Depreciation, amortization and finance expense
Loss (gain) on disposal of assets
Gain on redemption of preferred shares
Impairment of assets
Other items
Income tax expense
Net income from continuing operations
Net loss from discontinued operations
Net income
Earnings per share from continuing operations
Basic
Diluted
Cash dividends declared per common share
Adjusted EBITDA (note 1)
Adjusted EBITDA as a % of revenue
Cash Flows
Funds from continuing operations (note 1 & 2)
Changes in non-cash working capital
Net repayment of:
Bank indebtedness
Long term debt
Redemption of preferred shares
Issuance of common shares on exercise of stock options
Dividends paid
Purchase of capital and intangible assets, net of disposals
Business acquisition, net of disposals
(in thousands of dollars)
Financial Position
Working capital (note 1)
Total assets
Return on capital employed (note 1)
Net debt (note 1)
Net cash and cash equivalents (note 1)
Total non-current liabilities
2013
$
121,692
40,012
161,704
33,482
21%
8,552
(46)
4,437
106
-
-
-
6,048
14,385
-
14,385
0.49
0.49
0.11
25,600
16%
18,413
(521)
-
(1,350)
-
2,934
(2,923)
(2,965)
-
2013
$
47,844
134,315
29%
-
15,146
7,397
Year Ended December 31
2012
$
114,442
55,917
170,359
29,919
18%
8,571
43
4,443
(246)
(670)
182
(638)
4,744
13,490
-
13,490
0.47
0.46
0.055
22,518
13%
15,152
(5,355)
-
(1,376)
(2,075)
847
(1,010)
(2,810)
-
As at December 31
2012
$
31,655
120,526
27%
-
84
8,618
2011
$
101,590
25,456
127,046
19,454
15%
9,986
(373)
5,589
(356)
-
-
-
1,154
3,454
(164)
3,290
0.12
0.12
-
10,349
8%
8,417
4,782
(8,565)
(4,824)
-
-
-
(1,145)
1,336
2011
$
23,387
113,899
12%
4,567
-
15,229
Note 1: Gross profit, gross margin, adjusted EBITDA, funds from continuing operations, working capital, return on capital employed, net debt and net
cash and cash equivalents are non-IFRS measures and are defined later in the MD&A under "Non-IFRS Measures.”
Note 2: Funds from continuing operations excludes changes in non-cash working capital.
7
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Revenue
($000s)
2013
2012
Twelve Months
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
104,878
16,814
121,692
98,601
15,841
114,442
6%
6%
6%
40,012
161,704
55,917
170,359
(28%)
(5%)
Revenue was $161.7 million for the year ended December
31, 2013, down $8.7 million or 5% from $170.4 million as
compared to the prior year. Revenue generated by the
Petroleum and Water Product groups grew, but these
increases were offset by the decrease in the Corrosion
Products group. The change in revenue reflects the
factors noted below:
Underground Fluid Containment
Underground revenue of $121.7 million, was $7.3 million
or 6% higher for the year ended December 31, 2013,
compared with the year ended December 31, 2012.
The $6.3 million or 6% increase in Petroleum Products
revenue was attributable to both the Canadian and US
operations with an increase of $4.0 million or 4%, prior to
impact for
a positive foreign exchange conversion
reporting purposes.
In the US, sales to distributors and contractors were up
16% over 2012. Sales to retail petroleum marketers were
up slightly compared to 2012.
Canadian Petroleum Products revenue in 2013 was up
$2.4 million or 9% from 2012, attributable to an increase
in sales to distributors, contractors and retail petroleum
marketers, and partially offset by a decrease in sales to
major oil customers.
Petroleum Products revenue also includes international
operations which were down $0.4 million due to lower
Parabeam® sales, as compared to 2012.
The 6% increase in Water Products revenue in 2013
compared with 2012 was attributable to Canadian sales,
which rose by $1.0 million or 26% compared to 2012. A
3% decrease in US Water Products was offset by a
positive impact on the conversion of US to Canadian
dollar sales for reporting purposes. The reduction in US
government economic stimulus spending is being offset
by increasing commercial and residential construction
spending, albeit at a slow pace,
in the residential
segment.
%
change
Aboveground Fluid Containment
Aboveground revenue of $40.0 million for 2013 was $15.9
million or 28% lower than $55.9 million a year earlier. Oil
Sands revenue decreased by over $7.0 million as
compared to 2012. In the Industrial Corrosion market,
revenue was down $9.5 million prior to a $0.7 million
positive foreign exchange conversion impact for reporting
purposes. A $5.9 million increase in field service revenue
was more than offset by products revenue decrease of
$19.4 million as compared to 2012.
The Aboveground operating segment is more dependent
on larger orders that have a longer order cycle from
planning to order fulfilment than the Underground
operating segment, and the timing of revenue is impacted
accordingly.
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Twelve Months
2013
2012
%
change
% of rev
2013
25,451
20,423
25%
21%
8,031
9,496
(15%)
33,482
29,919
12%
20%
21%
In 2013, gross profit of $33.5 million increased by $3.6
million or 12% compared to 2012. Gross margin increased
to 21% from 18% in 2012. The changes reflect the factors
discussed below:
Underground Fluid Containment
Underground gross profit of $25.5 million was up $5.0
million or 25% from $20.4 million in 2012. Gross margin of
21%, a three percentage point increase from 18% in 2012,
was achieved with process improvements in operations,
changes in customer mix, and increased sales volume
without a corresponding increase in fixed costs. These
factors were partially offset by the competitive pricing
pressures that negatively impacted profitability.
8
Management's Discussion and Analysis
Aboveground Fluid Containment
euro Conversion Rates
Aboveground gross profit was $8.0 million, down $1.5
million or 15% from $9.5 million in 2012. Gross margin of
20% improved three percentage points from 17% in 2012.
The improvement in gross margin was derived from the
Industrial Corrosion markets which were significantly
impacted by a large low margin order in the prior year.
The Industrial Corrosion market achieved both gross
profit and gross margin improvements in 2013 compared
to 2012. However these improvements were partially
offset by lower activity in the Oil Sands market in 2013.
General and Administration
($000s)
2013
2012
% change
Twelve Months
8,552
8,571
nil
General and administration (“G&A”) expense for the year
ended December 31, 2013 was comparable to 2012.
Inflationary pressures were offset by lower restructuring
costs in 2013 as compared to 2012.
Foreign Exchange (Gain) Loss
($000s)
2013
2012
Twelve Months
(46)
43
The foreign exchange gain and loss for each period
primarily related to the combination of fluctuations in the
US dollar conversion rate and the US denominated
monetary assets and liabilities held by the Company’s
Canadian operations.
The following tables detail the US dollar and euro
conversion rates.
US Dollar Conversion Rates
Year
Ended
2013
2012
Avg.
Close
Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.01
1.02
1.04
1.05
1.03
1.02 1.00
1.05 1.01
1.00
1.03
1.07
0.99
1.07 1.00
1.00
1.03
0.98
1.00
1.00
Avg.
Change
1%
1%
4%
6%
Close
Change
2%
2%
5%
7%
3%
7%
Year
Ended
2013
2012
Avg.
Close
Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.33
1.34
1.38
1.43
1.37
1.31 1.31
1.37 1.30
1.39 1.25
1.47 1.29
1.47 1.29
1.33
1.29
1.27
1.32
1.32
Avg.
Change
2%
3%
10%
11%
6%
Close
Change
2%
6%
9%
11%
11%
For additional information on the Company’s exposure to
fluctuations in foreign exchange rates see the “Financial
Instruments” section included later in this MD&A.
Depreciation and Amortization
($000s)
2013
2012
% change
Twelve Months
3,991
3,673
9%
The 9% year over year increase in depreciation and
amortization expense primarily resulted from the increase
in the
in maintenance capital expenditures
fourth quarter of 2012. Overall, annual maintenance
capital expenditures were consistent with the prior year
at approximately $3.0 million per year.
incurred
Finance Expense
($000s)
2013
2012
% change
Twelve Months
446
770
(42%)
The $0.3 million or 42% reduction in finance expense in
2013 compared to 2012 was the result of a reduction in
net debt and the redemption of the preferred shares that
occurred during June of 2012 as discussed in further detail
below. In addition, in 2013 the Company was able to
significantly reduce the use of bank indebtedness as
compared to 2012.
9
Management's Discussion and Analysis
Disposal of Assets, Settlement of Preferred Shares and
Other Items
In 2012, management entered into an agreement with
the former owner of Dualam Plastics Inc. (“DPI”), now
ZCL-Dualam Inc. (“ZCL Dualam”), dealing with matters
that had arisen subsequent to the purchase of DPI. The
agreement resulted in the redemption of the preferred
shares for a gain of $0.7 million, the sale of two former
DPI properties for a gain of $0.3 million and the
settlement of claims for proceeds of $1.3 million. Certain
of the claims had been previously expensed resulting in a
recovery of other items. The balance of the claims
settlement was included in provisions.
Income Taxes
Income tax expense for the year ended December 31,
2013, represented 29.6% of pre-tax income, compared to
26.0% of pre-tax income in 2012. The change in the
effective tax rate from the prior year is due to a higher
percentage of earnings in the US versus Canada as the
corporate tax rates in the US are higher than Canada. In
addition, the prior year gain on the redemption of the
preferred shares and the gain on disposal of assets
resulted in a reduction in the 2012 effective tax rate.
Those gains were not taxed at the same rate as operating
income, therefore reducing the effective tax rate in 2012
compared to the current period.
LIQUIDITY AND CAPITAL RESOURCES
Comprehensive Income (Loss)
(loss)
income
for each period
operations with
Comprehensive
is
comprised of net income and the effects of translation of
currencies
foreign
denominated in US dollars and euros. For accounting
purposes, assets and liabilities of these foreign operations
are translated at the exchange rate in effect on the
balance sheet date.
functional
The table below details the impact of the translation of
foreign operations on comprehensive income before the
impact of net income.
($000s)
2013
2012
Twelve Months
4,219
(954)
The foreign translation gain in the year ended December
31, 2013 was due to the strengthening of the US dollar
relative to the Canadian dollar throughout the year from
1.00 to 1.07. In 2012, the US dollar dropped from 1.02 to
1.00 and generated a loss on the translation of foreign
operations.
Working Capital
Credit Arrangements
As at December 31, 2013, the Company
increased
working capital (current assets less current liabilities) by
$16.2 million to $47.8 million compared to $31.7 million
as at December 31, 2012. The majority of the increase
was attributed to positive cash flows from operations of
$18.4 million. Decreases
in accounts receivable also
contributed to the improvement in working capital.
The Company’s operating credit facility is provided by a
Canadian chartered bank. The maximum available funds
under this facility is $20.0 million, subject to prescribed
margin requirements related to a percentage of accounts
receivable and inventory balances at a point in time,
reduced by priority claims. The operating facility is due on
demand and matures on May 31, 2015.
As at December 31, 2013, the Company had cash and cash
equivalents of $18.9 million (December 31, 2012 - $4.8
million) and net cash of $15.1 million (December 31, 2012
– net cash of $0.1 million). Net debt and net cash are
defined later in this MD&A under “Non-IFRS Measures.”
Management believes that
internally generated cash
flows, along with the available revolving operating credit
facility, will be sufficient to cover the Company’s normal
operating and capital expenditures for the foreseeable
future.
The Company’s term loan is provided by a Canadian
chartered bank and requires monthly interest payments
and quarterly principal repayments of $0.3 million
Canadian dollars, with the balance due on maturity on
May 31, 2015. The interest charged on the loan is the US
dollar based 30-day LIBOR plus 225 basis points. The
Company is also subject to mandatory repayments of
outstanding principal equal to 100% of any net proceeds
on asset disposals and insurance proceeds received by the
Company.
Share Capital
During the year ended December 31, 2013, the company
issued 812,917 shares on the exercise of stock options.
10
Management's Discussion and Analysis
Cash Flows
($000’s)
Operating activities
Financing activities
Investing activities
Foreign exchange(1)
Twelve Months
2013
17,892
(1,339)
(2,965)
448
14,036
2012
9,797
(3,614)
(2,810)
(234)
3,139
(1) Foreign exchange gain (loss) on cash held in foreign currency.
Operating Activities
The cash flows from operating activities reflect the net
impact of
i) funds from operations (for additional
information see the “Non-IFRS Measures” section later in
this MD&A) and ii) changes in non-cash working capital.
Funds from operations totalled $18.4 million for the year
ended December 31, 2013, up $3.3 million from $15.2
million for the year ended December 31, 2012. The
increase relative to 2012
is due primarily to the
improvement in overall gross profit.
Changes in non-cash working capital totalled negative
$0.5 million for the year ended December 31, 2013
compared to negative $5.4 million for the year ended
December 31, 2012. The decrease in accounts receivable
was the major contributing factor for the reduction in
non-cash working capital requirements relative to 2012.
This accounts receivable decrease was partially offset by a
decrease in accounts payable, accrued liabilities and
provisions and income taxes payable as at December 31,
2013 relative to December 31, 2012.
Financing Activities
Cash flows used in financing activities were $1.3 million
for the year ended December 31, 2013 compared to $3.6
million for the year ended December 31, 2012. The
exercise of stock options in 2013 generated $2.9 million in
cash inflows compared to the $0.8 million generated in
2012. The dividends paid in 2013 were $2.9 million, a
$1.9 million increase over 2012. In 2012, there was a $2.1
million cash outflow relating to the redemption of
preferred shares issued on the acquisition of ZCL Dualam.
Investing Activities
The cash flows used in investing activities were $3.0
million for the year ended December 31, 2013 compared
to $2.8 million for 2012. Purchases of property, plant and
equipment and intangible assets were $3.1 million for
both the years ended 2013 and 2012, however there were
higher proceeds on disposal of property, plant and
equipment in 2012 relative to 2013.
Contractual Obligations
The Company’s captive
insurance company, Radigan
Insurance Inc. (“Radigan”) provides insurance protection
for product warranties and general liability coverage for
the US operations. Radigan holds restricted cash
equivalents of $0.25 million US as collateral on a contract
performance guarantee.
The Company has provided a letter of credit in the
amount of $1.0 million US to secure a line of credit for the
same amount for our US operations. The Company has
also provided two letters of credit for a total of $0.7
million to secure claims for the Company’s US workers’
compensation program. In the normal course of business,
the Company provides letters of credit as collateral for
contract performance guarantees. As at December 31,
2013, the performance letters of credit issued totalled
$1.4 million.
As at December 31, 2013, ZCL’s minimum annual lease
commitments under all non-cancellable operating leases
for production facilities, office space and automotive and
equipment totalled $6.2 million.
The following table details the Company’s contractual
obligations due over the next five years and thereafter:
($000s)
2014
2015
2016
2017
2018
Thereafter
Total
Long Term
Debt
1,350
1,350
1,036
-
-
-
3,736
Operating
Leases
2,449
1,490
1,157
756
336
-
6,188
Total
3,799
2,840
2,193
756
336
-
9,924
11
Management's Discussion and Analysis
SUMMARY OF QUARTERLY RESULTS
The table below presents selected financial information
for the eight most recent quarters, which should be read
in conjunction with the applicable interim unaudited and
annual audited consolidated financial statements and
accompanying notes.
The Company’s financial results have historically been
affected by seasonality with the lowest levels of activity
occurring in the first half of the year, particularly in the
first quarter. In addition, the Company is subject to
fluctuations in the US to Canadian dollar exchange rate
since a significant portion of its revenue is denominated in
US dollars. Over the past eight quarters, the Canadian to
US dollar conversion rate has ranged from a low of 0.98 in
the third quarter of 2012 to a high of 1.07 in the fourth
quarter of 2013.
For the three months ended
(in thousands of dollars,
except per share amounts)
Revenue
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
2013
2012
Dec 31
$
37,715
Sep 30
$
43,931
Jun 30 Mar 31
$
47,250
$
32,809
Dec 31
$
44,866
Sep 30
$
50,067
Jun 30 Mar 31
$
42,850
$
32,576
1,769
4,993
5,087
2,536
2,876
4,805
4,207
1,602
0.06
0.06
0.03
0.17
0.17
0.03
0.17
0.17
0.09
0.09
0.025
0.025
0.10
0.10
0.02
0.17
0.16
0.015
0.15
0.15
0.01
0.06
0.06
0.01
12
Management's Discussion and Analysis
FOURTH QUARTER RESULTS
Selected Financial Information
(in thousands of dollars,
except per share amounts)
Operating Results
Revenue
Underground Fluid Containment
Aboveground Fluid Containment
Total revenue
Gross profit (note 1)
Gross margin (note 1)
General and administration
Foreign exchange (gain) loss
Depreciation and amortization
Finance expense
Loss on disposal of assets
Impairment of assets
Income tax expense
Net income
Earnings per share
Basic
Diluted
Cash dividends declared per common share
Adjusted EBITDA (note 1)
Adjusted EBITDA as a % of revenue
Cash Flows
Funds from operations (note 1 & 2)
Changes in non-cash working capital
Net repayment of:
Fourth Quarter Ended December 31
2013
$
32,074
5,640
37,714
5,755
15%
1,989
(52)
1,077
97
106
-
769
1,769
0.06
0.06
0.03
3,975
11%
2,667
9,174
2012
$
29,231
15,635
44,866
7,662
17%
2,406
15
931
153
10
182
1,089
2,876
0.10
0.10
0.02
5,386
12%
4,167
5,421
Bank indebtedness
Long term debt
(5,454)
(337)
463
Issuance of common shares on exercise of stock options
(434)
Dividends paid
(1,222)
Purchase of capital and intangible assets
Disposal of assets
182
Note 1: Gross profit, gross margin, adjusted EBITDA, and funds from operations are non-IFRS measures and are defined later in the MD&A
under “Non-IFRS Measures.”
Note 2: Funds from operations excludes changes in non-cash working capital.
-
(338)
1,302
(885)
(1,026)
125
13
Management's Discussion and Analysis
Overall Fourth Quarter Performance
Net income in the fourth quarter of 2013 was $1.8 million,
down 36% or $1.0 million from $2.9 million a year earlier.
Earnings per diluted share in the fourth quarter of 2013
were $0.06, down $0.04 from $0.10 per diluted share a
year earlier. The decrease in net income was a result of
significantly
lower revenues from the Aboveground
operating segment. A $0.4 million decrease in general
and administration costs as compared to the same
quarter in 2012, was partially offset by an increase in
depreciation and amortization.
Revenue
($000s)
2013
2012
%
change
Fourth Quarter
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
27,634
4,440
32,074
25,544
3,687
29,231
8%
20%
10%
5,640
37,714
15,635
44,866
(64%)
(16%)
Revenue for the fourth quarter ended December 31,
2013, was $37.7 million, down $7.2 million or 16% from
$44.9 million in the fourth quarter of 2012. Increased
revenue in the Underground operating segment was more
than offset by a decrease in the Aboveground operating
segment. The change in revenue reflects the factors
noted below:
Underground Fluid Containment
Underground revenue of $32.1 million was $2.8 million or
10% higher in the fourth quarter of 2013, compared with
$29.2 million in the fourth quarter of 2012.
In the fourth quarter of 2013, Petroleum Products
revenue was $27.6 million, up $2.1 million or 8% from
$25.5 million in the same period last year, the increase
attributable
the Canadian operations. Canadian
Petroleum Products revenue was up $2.8 million,
primarily due to an increase in sales to distributors and
retail stations. Sales to major oil customers were down
compared to the same quarter of 2012.
to
In the US, sales were down 8% compared to the same
quarter in 2012, prior to a positive impact on the US to
Canadian dollar translation for reporting purposes of
approximately $1.0 million. Sales
to distributors,
contractors were down 3%, and sales to retail service
station customers were down slightly over the 2012
fourth quarter revenue. The decrease was a result of a
$1.1 million decrease in sales to other customers which
had a particularly strong fourth quarter in 2012 with sales
of $1.4 million.
Petroleum Products also
from
international operations, which was down in the fourth
quarter of 2013 due to lower Parabeam® sales, as
compared to the same quarter in 2012.
revenue
includes
Water Products revenue for the fourth quarter of 2013 of
$4.4 million was up $0.8 million or 20% from $3.7 million
increase was
in the fourth quarter of 2012. The
attributable to the Canadian market which was up $0.9
million over the fourth quarter of 2012 and included a
small positive foreign exchange translation adjustment for
reporting purposes.
Aboveground Fluid Containment
Aboveground revenue of $5.6 million
in the fourth
quarter of 2013 was $10.0 million or 64% lower than
$15.6 million in the same quarter a year earlier, with the
decrease attributable to both US and Canadian markets.
Revenue
from our Western Canadian Corrosion
customers was down by $1.2 million as compared to the
same quarter in 2012. In Industrial Corrosion, revenue
from our field service operations decreased significantly,
as expected, due to the substantial completion of a major
field service project at the end of third quarter of 2013.
Also in Industrial Corrosion, product revenue was down
$4.2 million compared to the fourth quarter of 2012.
The Aboveground operating segment is more dependent
on larger orders that have a longer order cycle from
planning to order fulfilment than the Underground
operating segment, and the timing of revenue is impacted
accordingly.
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Fourth Quarter
2013
2012
%
change
% of rev
2013
5,673
5,167
10%
18%
82
2,495
(97%)
2%
5,755
7,662
(25%)
15%
In the fourth quarter of 2013, gross profit of $5.8 million
decreased by $1.9 million or 25% compared to $7.7
million for the same quarter in 2012. Gross margin
decreased to 15% from 17% in the same quarter of 2012.
These changes reflect the factors discussed below:
14
Management's Discussion and Analysis
Underground Fluid Containment
Underground gross profit of $5.7 million was up $0.5
million or 10% from $5.2 million in the same quarter of
2012. Gross margin for the fourth quarter remained flat
year over year at 18%.
Gross margin for US Underground operations increased
slightly compared to the same quarter in 2012 prior to
any impacts from foreign exchange. Gross margins in
Canada decreased compared to the same quarter in 2012.
Aboveground Fluid Containment
Aboveground gross profit was $0.1 million, down $2.4
million or 96% from $2.5 million for the quarter ended
December 31, 2012. Gross margin of 2% was down from
16% in the fourth quarter of 2012. The year over year
decreases in both gross margin and gross profit were due
to a lack of sales volume resulting in an inability to
support the fixed manufacturing cost base
in the
Aboveground operating segment. The majority of the
reduction in the gross profit and gross margin was derived
from the Industrial Corrosion products group. In addition,
a dispute settlement with a large customer contributed a
four percentage point drop in the gross margin in the
fourth quarter of 2013.
General and Administration
($000s)
2013
2012
% change
Fourth Quarter
1,989
2,406
(17%)
General and administration (“G&A”) expense of $2.0
million for the fourth quarter ended December 31, 2013
was down $0.4 million or 17% over the fourth quarter of
2012. The decrease was primarily a result of a reduction
in restructuring costs when compared to the same
quarter of 2012.
Foreign Exchange (Gain) Loss
($000s)
2013
2012
Fourth Quarter
(52)
15
The foreign exchange (gain) loss for each quarter was
primarily related to the combination of fluctuations in the
US dollar conversion rate and the US denominated
monetary assets and liabilities held by the Company’s
Canadian operations.
The following table details the US dollar and euro
conversion rates relative to the Canadian dollar.
US Dollar and euro Conversion Rates
Fourth
Quarter
2013
2012
Avg.
Close
Avg.
Close
USD
euro
1.05
1.43
1.07 0.99
1.47 1.29
1.00
1.32
Avg.
Change
6%
6%
Close
Change
7%
11%
For additional information on the Company’s exposure to
fluctuations in foreign exchange rates see the “Financial
Instruments” section included later in this MD&A.
Depreciation and Amortization
($000s)
2013
2012
% change
Fourth Quarter
1,077
931
16%
increase
The 16%
in depreciation and amortization
expense for the quarter ended December 31, 2013
compared to the quarter ended December 31, 2012,
primarily resulted from higher maintenance capital
expenditures.
Finance Expense
($000s)
2013
2012
% change
Fourth Quarter
97
153
(37%)
The 37% reduction in finance expense in the third quarter
of 2013 compared to the same quarter in 2012, was the
result of an increase in net cash in 2013.
Income Taxes
Income tax expense for the three months ended
December 31, 2013, represented 30% of pre-tax income,
compared to 28% of pre-tax income in the same quarter
of 2012. The increase in the 2013 annual effective tax
rate to 29.6% is a result of a higher percentage of
earnings in the US which has a higher corporate tax rate.
Comprehensive Income
Comprehensive income for each period is comprised of
net income and the effects of translation of foreign
operations with functional currencies denominated in US
dollars and euros. For accounting purposes, assets and
liabilities of these foreign operations are translated at the
exchange rate in effect on the balance sheet date.
15
Management's Discussion and Analysis
The table below details the impact of the translation of
foreign operations on comprehensive income before the
impact of net income.
($000s)
2013
2012
Fourth Quarter
2,319
793
The foreign translation gain in the fourth quarter of 2013
was due to strengthening of the US dollar relative to the
Canadian dollar throughout the three months from 1.03
to 1.07. In the fourth quarter of 2012, the US dollar also
strengthened from 0.98 to 1.00.
FINANCIAL INSTRUMENTS
rate
liquidity
risk and
risk), credit
The Company’s activities expose it to a variety of financial
risks including market risk (foreign exchange risk and
interest
risk.
Management reviews these risks on an ongoing basis to
ensure they are appropriately managed. The Company
may use foreign exchange forward contracts to manage
exposure to fluctuations in foreign exchange from time to
time. The Company does not currently have a practice of
trading derivatives and had no derivative instruments
outstanding at December 31, 2013.
Interest Rate Risk
The Company’s objective in managing interest rate risk is
to monitor expected volatility in interest rates while also
minimizing the Company’s financing expense
levels.
Interest rate risk mainly arises from fluctuations of
interest rates and the related impact on the return earned
on cash and cash equivalents, restricted cash and the
expense on floating rate debt. On an ongoing basis,
management monitors changes in short term interest
rates and considers long term forecasts to assess the
potential cash flow
impact on the Company. The
financial
Company does not currently hold any
instruments to mitigate its interest rate risk. Cash and
cash equivalents and restricted cash earn interest based
on market interest rates. Bank indebtedness balances and
long term debt have floating interest rates which are
subject to market fluctuations.
The effective interest rate on the bank indebtedness
balance as at December 31, 2013, was prime plus 75 basis
points, 3.75% (December 31, 2012 - prime plus 100 basis
points, 4.00%) adjusted quarterly based on certain
financial indicators of the Company. The effective interest
rate on the term loan balance as at December 31, 2013,
was the 30 day US LIBOR rate plus 225 basis points, 2.41%
(December 31, 2012 – US LIBOR rate plus 250 basis
points, 2.71%), adjusted quarterly based on certain
financial indicators of the Company. With other variables
unchanged, an increase or decrease of 100 basis points in
Financial Position/Cash Flows
The Company’s working capital (current assets
less
current liabilities) of $47.8 million as at December 31,
2013 was an improvement over the $44.7 million at
September 30, 2013. Positive cash flows from operations
of $2.7 million, as well as decreases
in accounts
receivable, inventory, and accounts payable contributed
to the improvement in working capital.
the US LIBOR and Canadian prime interest rate as at
December 31, 2013 would have a minimal impact on net
income for the period ended December 31, 2013.
Foreign Exchange Risk
The Company operates on an international basis and is
exposed to foreign exchange risk arising from transactions
denominated
in foreign currencies. The Company’s
objective with respect to foreign exchange risk is to
minimize the impact of the volatility related to financial
assets and liabilities denominated in a foreign currency
where possible through effective cash flow management.
Foreign currency exchange risk is limited to the portion of
the Company’s business transactions denominated in
currencies other than Canadian dollars. The Company’s
most significant foreign exchange risk arises primarily
with respect to the US dollar. The revenues and expenses
of the Company’s US operations are denominated in US
dollars. Certain of the revenue and expenses of the
Canadian operations are also denominated in US dollars.
The Company is also exposed to foreign exchange risk
associated with the euro due to its operations in The
Netherlands, however, these amounts are not significant
to the Company’s consolidated financial results. On an
ongoing basis, management monitors changes in foreign
currency exchange rates and considers
long term
forecasts to assess the potential cash flow impact on the
Company.
The tables that follow provide an indication of the
Company’s exposure to changes in the value of the US
dollar relative to the Canadian dollar, as at and for the
year ended December 31, 2013. The analysis is based on
financial assets and liabilities denominated in US dollars at
the end of the period (“balance sheet exposure”), which
are separated by domestic and foreign operations, and US
dollar denominated revenue and operating expenses
during the period (“operating exposure”).
16
Management's Discussion and Analysis
Balance sheet exposure related to financial assets, net of
financial liabilities, at December 31, 2013, was as follows:
Company perceives the customer has a higher level of
risk.
(in thousands of US dollars)
Foreign operations
Domestic operations
Net balance sheet exposure
$
15,365
(2,264)
13,101
Operating exposure for the twelve months ended
December 31, 2013, was as follows:
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
$
109,069
94,588
14,481
The weighted average US to Canadian dollar translation
rate was 1.03 for the year ended December 31, 2013. The
translation rate as at December 31, 2013, was 1.07.
Based on the foreign currency exposures noted above,
with other variables unchanged, a 20% decrease in the
Canadian dollar would have impacted net income for the
twelve months ended December 31, 2013, as follows:
(in thousands of US dollars)
$
Net balance sheet exposure of domestic operations (290)
1,853
Net operating exposure of foreign operations
1,563
Change in net income
Other comprehensive income would have changed $2.0
million due to the net balance sheet exposure of financial
assets and liabilities of foreign operations. The timing and
volume of the above transactions, as well as the timing of
their settlement, could impact the sensitivity of the
analysis.
Credit Risk
Credit risk is the risk of a financial loss to the Company if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations. The Company is exposed
to credit risk through its cash and cash equivalents,
restricted cash and accounts receivable. The Company
manages the credit risk associated with its cash and cash
equivalents and restricted cash by holding its funds with
reputable financial institutions and investing only in highly
rated securities that are traded on active markets and are
capable of prompt liquidation. Credit risk for trade and
other accounts
through
established credit monitoring activities. The Company also
mitigates its credit risk on trade accounts receivable by
obtaining a cash deposit from certain customers with no
prior order history with the Company, or where the
receivable are managed
The Company has a concentration of customers in the
upstream and downstream oil and gas and industrial
corrosion sectors. The concentration risk is mitigated by
the number of customers, growth and diversification of
the customer base and by a significant portion of the
customers being large international organizations. As at
December 31, 2013, one customer exceeded 10% of the
consolidated trade accounts receivable balance. The
balance of $3.9 million USD was being disputed by the
it was settled for $3.5 million USD
customer and
subsequent to the year end. The difference of $0.4
million USD was included in the allowance for doubtful
accounts at year end. Losses under trade accounts
receivable have not historically been significant. The
creditworthiness of new and existing customers is subject
to review by management by considering such items as
the type of customer, prior order history and the size of
the order. Decisions to extend credit to new customers
are approved by management and the creditworthiness
of existing customers is monitored.
The Company reviews
its trade accounts receivable
regularly and amounts are written down to their expected
realizable value when the account is determined not to be
fully collectable. This generally occurs when the customer
has indicated an inability to pay, the Company is unable to
communicate with the customer over an extended period
of time, and other methods to obtain payment have been
considered and have not been successful. The bad debt
expense is charged to net income in the period that the
account is determined to be doubtful. Estimates for the
allowance for doubtful accounts are determined on a
customer-by-customer evaluation of collectability at each
reporting date, taking into account the amounts which
are past due and any available relevant information on
the customers’ liquidity and going concern status. After all
efforts of collection have failed, the accounts receivable
balance not collected is written off with an offset to the
allowance for doubtful accounts, with no impact on net
income.
The Company’s maximum exposure to credit risk for trade
accounts receivable is the carrying value of $24.7 million
as at December 31, 2013 (December 31, 2012 - $27.4
million). On a geographic basis as at December 31, 2013,
approximately 22% (December 31, 2012 – 48%) of the
balance of trade accounts receivable was due from
Canadian and non-US customers and 78% (December 31,
2012 – 52%) was due from US customers. The change in
geographic accounts receivable is mainly due to the
disputed significant receivable of $3.9 million that was
settled after the year ended December 31, 2013.
17
Management's Discussion and Analysis
Payment terms are generally net 30 days.
As at
December 31, 2013, the percentages of trade accounts
receivable were as follows:
December 31,
2013
45%
24%
19%
3%
December 31,
2012
60%
27%
6%
2%
9%
100%
5%
100%
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due greater than
90 days
Total
Liquidity Risk
The Company’s objective related to liquidity risk is to
effectively manage cash flows to minimize the exposure
that the Company will not be able to meet its obligations
associated with financial liabilities. On an ongoing basis,
liquidity risk is managed by maintaining adequate cash
and cash equivalent balances and appropriately utilizing
RISKS AND UNCERTAINTIES
The Company is subject to a number of known and
unknown risks, uncertainties and other factors that could
cause the Company’s actual future results to differ
materially from those historically achieved and those
reflected in forward-looking statements made by the
Company. These factors include, but are not limited to,
fluctuations in the level of capital expenditures in the
Petroleum Products, Water Products and Corrosion
Products markets; drilling activity and oil and natural gas
prices and other factors that affect demand for the
Company’s products and services; industry competition;
the need to effectively integrate acquired businesses; the
ability of management to implement the Company’s
business strategy effectively; political and general
economic conditions; the ability to attract and retain key
personnel; raw material and labour costs; fluctuations in
the US and Canadian dollar exchange rates; accounts
receivable risk; the ability to generate capital or maintain
liquidity and credit agreements necessary to fund future
operations; and other risks and uncertainties described
under the heading “Risk Factors” in the Company’s most
recent Annual Information Form and elsewhere in other
documents filed with Canadian provincial securities
authorities which
the public
at www.sedar.com.
available
are
to
available
lines of credit. Management believes that
forecasted cash flows from operating activities, along with
the available lines of credit, will provide sufficient cash
requirements to cover the Company’s forecasted normal
operating activities, commitments and budgeted capital
expenditures.
The Company has pledged as general collateral for
advances under the operating credit facility and the bank
term loan a general security agreement on present and
future assets, guarantees from each present and future
direct and indirect subsidiary of the Company supported
by a first registered security over all present and future
assets, and pledge of shares. The Company
is not
permitted to sell or re-pledge significant assets held under
collateral without consent from the lenders.
For information on contractual maturities on long term
obligations, please refer to the “Liquidity and Capital
Resources” section of this MD&A.
Environmental Risks
To conduct business operations, the Company owns or
leases properties and is subject to environmental risks
due to the use of chemicals in the manufacturing process.
With the ZCL Dualam acquisition, phase two assessments
were undertaken and, as a result, the Company was
aware of environmental issues on one of the remaining
owned properties. This ZCL Dualam property has been
fully remediated and no clean-up costs have been accrued
in the financial statements.
ZCL manages its environmental risks by appropriately
in an
dealing with chemicals and waste material
environmentally safe and responsible manner, and in
accordance with applicable regulatory requirements. In
addition, the Company has a Health, Safety and
Environment Committee that meets regularly to review
and monitor environmental issues, compliance, risks and
mitigation strategies. However, it is unknown whether
specific environmental conditions and
incidents will
impact ZCL operations in the future.
The Company elects to partially self-insure against risk of
environmental contamination at its production facilities
as it has determined the risk to be low. The Company is
not aware of any unrecorded material environmental
liabilities other than the items noted above.
18
Management's Discussion and Analysis
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements have been prepared
following IFRS. The measurement of certain assets and
is dependent upon future events and the
liabilities
outcome will not be fully known until future periods.
Therefore, the preparation of the financial statements
requires management
and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Such estimates and
assumptions have been made using careful judgments,
which in management’s opinion, are reasonable and
conform to the significant accounting policies summarized
in the December 31, 2013 annual consolidated financial
statements. Actual
those
estimated.
results may vary
to make
estimates
from
Impairment
The Company assesses impairment at each reporting
period by evaluating the circumstances specific to the
organization that may lead to an impairment of assets. In
addition to the quarterly assessment, the Company also
performs an annual impairment test on goodwill and
certain intangible assets in accordance with IAS 36:
“Impairment of Assets.”
indicators of
impairment exist, and at
Where
least
annually for goodwill and certain intangible assets, the
recoverable amount of the asset or group of assets (cash
is compared against the carrying
generating units)
amount. Any excess of the carrying amount over the
recoverable amount will be recognized as an impairment
loss in the income statement. The recoverable amount is
calculated as the higher of the assets’ (or group of assets)
value in use or fair value less cost to sell. The actual
growth
the
rates and other estimates used
determination of fair values at the time of impairment
tests may vary materially from those realized in future
periods.
in
Property, Plant and Equipment, Intangible Assets and
Goodwill
intangible assets are
lives are recorded at cost
Property, plant and equipment and intangible assets with
finite
less accumulated
depreciation and amortization. Goodwill and indefinite
life
recorded at cost. The
unamortized balances, or carrying values, are regularly
reviewed for recoverability or tested for impairment
whenever events or circumstances indicate that these
amounts exceed their fair values. The valuation of these
assets is based on estimated future net cash flows, taking
into account current and future industry and other
conditions. An impairment loss would be recognized for
the amount that the carrying value exceeds the fair value.
Depreciation and amortization of property, plant and
equipment and intangible assets with finite lives is based
on estimates of the useful lives of the assets. The useful
lives are estimated, and a method of depreciation and
amortization is selected at the time the assets are initially
acquired and then re-evaluated each reporting period.
Judgment is required to determine whether events or
circumstances warrant a revision to the remaining periods
of depreciation and amortization. The estimates of cash
flows used to assess the potential impairment of these
assets are subject to measurement uncertainty. A
significant change in these estimates and judgments could
result
to depreciation and
amortization expense or impairment charges.
in a material change
Allowance for Doubtful Accounts
receivable balance
The Company’s accounts
is a
significant portion of overall assets. Credit is spread
among many customers and the Company has not
experienced significant accounts receivable collection
problems in the past. The Company performs ongoing
credit evaluations and maintains allowances for doubtful
accounts based on the assessment of individual customer
receivable balances, credit information, past collection
history and the overall financial strength of customers. A
change in these factors could impact the estimated
allowance and the provision for bad debts recorded in the
accounts. The actual collection of accounts receivable and
the resulting bad debts may differ from the estimated
allowance for doubtful accounts and the difference may
be material.
Self-insured Liabilities
The Company self-insures certain risks related to pollution
protection provided on certain product sales, general
liability claims and US workers compensation through
Radigan Insurance Inc., its captive insurance company.
The provision for self-insured liabilities includes estimates
of the costs of reported and expected claims based on
estimates of loss using assumptions determined by a
certified loss reserve analyst. The actual costs of claims
may vary from those estimates, and the difference may
be material.
Warranties
The Company generally warrants its products for a period
of one year after sale, and for up to 30 years for
corrosion, if the products are properly installed and are
used solely for storage of specified liquids. In Canada, the
Company markets a storage system under the Prezerver®
trademark that carries an enhanced protection program.
19
Management's Discussion and Analysis
The Prezerver system includes an enhanced 10 year
limited warranty covering product replacement, third-
party pollution protection, site clean-up and defence
costs up to the limits allowed under the warranty. Until
December 1, 2006, the Canadian Prezerver program was
covered by
insurance underwritten by a major
international insurer. Effective December 1, 2006, the
Company formed its own insurance captive to insure the
Prezerver program.
The Company provides for warranty obligations based on
a review of products sold and historical warranty costs
experienced. Provisions for warranty costs are charged to
manufacturing and selling costs and revisions to the
NEW ACCOUNTING STANDARDS
Certain new standards, interpretations and amendments
have been released by the IASB and were effective for
annual periods beginning on or after January 1, 2013. The
Company has adopted the following new standards and
in the audited consolidated financial
interpretations
statements and related notes for the year ended
December 31, 2013:
IFRS 10: “Consolidated Financial Statements”
replaces
Standing
standard
This
Interpretations
Committee 12: "Consolidation-Special Purpose Entities",
and parts of IAS 27: "Consolidated and Separate Financial
Statements". The new standard builds on existing
principles by identifying the concept of control as the
in whether an entity should be
determining factor
included
financial
consolidated
statements. The standard provides additional guidance to
assist in the determination of control where it is difficult
to assess. The adoption of this standard did not impact
the current or prior periods presented
these
consolidated financial statements.
Company’s
the
in
IFRS 12: “Disclosure of Interests with Other Entities”
IAS 31: “Interests
The standard includes all of the disclosures that were
previously included in IAS 27 “Consolidated and Separate
Financial Statements”,
Joint
Ventures” and IAS 28: “Investment in Associates”. These
disclosures relate to an entity’s interests in subsidiaries,
joint arrangements, associates and structured entities.
The adoption of this standard did not impact the current
or prior periods presented in these consolidated financial
statements.
in
estimated provision are charged to earnings in the period
in which they occur. While the Company maintains high
quality standards and has a limited history of liability or
warranty problems under its standard warranties or
Prezerver program, there can be no guarantee that the
warranty provision recorded, self-insurance provided by
ZCL's captive insurance company or third party insurance
will be sufficient to cover all potential claims. Excluding
the enhanced Prezerver warranty, the maximum exposure
to the Company for warranty claims is, at the Company’s
sole discretion, to repair or replace the product giving rise
to the claim. The actual costs of warranties may vary from
those estimated, and the difference may be material.
IFRS 13: “Fair Value Measurement”
This standard does not change the requirements of using
fair value, but rather, provides guidance on how to
measure the fair value of financial and non-financial
assets and liabilities when required or permitted by IFRS.
There are also additional disclosure requirements. The
adoption of this standard did not impact the current or
prior periods presented in these consolidated financial
statements.
Standards issued but not yet effective
Amendments to IFRS 7 and IAS 32: Offsetting Financial
Assets and Financial Liabilities
to
(e.g.,
rights
set-off and
agreements).
Amendments to IFRS 7 require an entity to disclose
related
information about
arrangements
The
collateral
disclosures would provide users with information that is
useful in evaluating the effect of netting arrangements on
an entity’s financial position. The new disclosures are
required for all recognised financial instruments that are
set off in accordance with IAS 32: “Financial Instruments:
Presentation”. The disclosures also apply to recognised
financial instruments that are subject to an enforceable
master netting arrangement or similar agreement,
irrespective of whether they are set off in accordance
with IAS 32. These amendments are effective for periods
beginning on or after January 1, 2014 and the adoption of
impact the
these amendments
Company’s financial statements.
is not expected to
Amendments to IAS 32 clarify the meaning of “currently
These
legally enforceable right to set-off”.
has a
amendments are effective for periods beginning on or
after January 1, 2014 and the adoption of these
amendments is not expected to impact the Company’s
financial statements.
20
Management's Discussion and Analysis
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Changes in Internal Control over Financial Reporting
(“DC&P”) are
Disclosure controls and procedures
designed to provide reasonable assurance that all
relevant information is gathered and reported to senior
management, including the President & Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”) of
ZCL on a timely basis so that appropriate decisions can be
made regarding public disclosure.
As at December 31, 2013, the CEO and the CFO have
evaluated the effectiveness of the design and operation
of our DC&P as defined by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on this evaluation, the CEO and the CFO
have concluded that, as at December 31, 2013, our DC&P
were effective to ensure that the material information
relating to ZCL and its consolidated subsidiaries would be
made known to them by others within those entities,
particularly during the period in which the MD&A and the
consolidated financial statements were being prepared.
Internal Controls over Financial Reporting
is
Internal control over financial reporting (“ICFR”)
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance
with IFRS. Management is responsible for establishing
and maintaining adequate ICFR. Management have
assessed the effectiveness of our ICFR at December 31,
2013, based on the criteria set forth in Internal Control –
Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Based on
this assessment, management
concluded that, as at December 31, 2013, our ICFR was
effective, and expect to certify ZCL’s annual filings with
the Canadian securities regulatory authorities.
TRANSACTIONS WITH RELATED PARTIES
components purchased
Certain manufacturing
for
$27,000 (2012 - $31,000) for the year ended December
31, 2013, included in manufacturing and selling costs in
the consolidated statements of income or inventories
were provided by a corporation whose Executive
Chairman is a director of the Company. The transactions
were incurred in the normal course of operations and
Management has evaluated whether there were changes
in the Company’s ICFR during the year ended December
31, 2013 that have materially affected, or are reasonably
likely to materially affect, the Company’s ICFR. No
material changes were identified.
Limitations on the Effectiveness of Disclosure Controls
and Procedures and Internal Control over Financial
Reporting
While management of the Company has evaluated the
effectiveness of DC&P and ICFR as at December 31, 2013,
and have concluded that these controls and procedures
are being maintained as designed, they expect that the
DC&P and ICFR may not prevent all errors and fraud. A
control system, no matter how well conceived or
operated, can only provide reasonable, not absolute
assurance that the objectives of the control system are
met.
recorded at
the exchange amount being normal
commercial rates for the products. Accounts payable and
accrued liabilities at December 31, 2013, included $1,000
(December 31, 2012 - $3,000) owing to the corporation.
There are no ongoing contractual or other commitments
resulting from these transactions.
21
Management’s Discussion and Analysis
OUTSTANDING SHARE DATA
As at March 7, 2014, there were 29,897,784 common
shares and 1,876,396 share options outstanding. Of the
options outstanding, 745,495 are currently exercisable
into common shares.
OTHER INFORMATION
Additional information relating to the Company, including
the Annual Information Form (AIF), is filed on SEDAR
at www.sedar.com.
NON-IFRS MEASURES
The Company uses both IFRS and non-IFRS measures to
make strategic decisions and set targets and believes that
these non-IFRS measures provide useful supplemental
information to investors. Gross profit, gross margin,
adjusted EBITDA, funds from continuing operations,
working capital, net debt, net cash, return on capital
employed and backlog are measures used by the
Company that do not have a standardized meaning
prescribed by IFRS and may not be comparable to similar
measures used by other companies. Included below are
tables calculating or reconciling these non-IFRS measures
where applicable.
Gross profit is defined as revenue less manufacturing and
selling costs. Manufacturing and selling costs include
fixed
direct materials and
manufacturing overhead and marketing and selling
expenses and exclude depreciation and amortization,
general and administration and financing expenses.
labour, variable and
Gross margin
revenue.
is defined as gross profit divided by
Adjusted EBITDA is defined as income from operations
income taxes, share-based
before finance expense,
compensation, depreciation of property, plant and
equipment, amortization of deferred development costs
and intangible assets, gains or losses on sale of assets, and
impairment of assets. Readers are cautioned that
adjusted EBITDA should not be construed as an
alternative to net income as determined in accordance
with IFRS.
Funds from continuing operations are defined as cash
flows from operating activities before changes in non-
cash working capital.
Working capital is defined as current assets less current
liabilities.
Net debt is defined as long term debt, including current
portion, plus bank indebtedness, less cash and cash
equivalents.
Net cash is defined as cash and cash equivalents less long
term debt, current portion of long term debt and bank
indebtedness.
Return on capital employed is defined as adjusted EBITDA
divided by average capital employed, being average
shareholders’ equity, plus average
long term debt,
including current portion and average preferred shares,
including current portion, less average cash and cash
equivalents.
Backlog is defined as the total value of orders that have
not yet been included in revenue and that management
has assessed as having a high certainty of being
performed because of the existence of a contract or
purchase order specifying the scope, value and timing of
an order.
22
Management’s Discussion and Analysis
RECONCILIATION OF NON-IFRS MEASURES
The following table presents the calculation of gross profit and gross margin.
(in thousands of dollars)
Revenue
Manufacturing and selling costs
Gross profit
Gross profit as a % of revenue
Fourth Quarter Ended
December 31
2013
$
37,714
31,959
5,755
15%
2012
$
44,866
37,204
7,662
17%
Year Ended
December 31
2012
$
170,359
140,440
29,919
18%
2013
$
161,704
128,222
33,482
21%
2011
$
127,046
107,592
19,454
15%
The following table reconciles net income in accordance with IFRS to EBITDA and adjusted EBITDA.
Fourth Quarter Ended
December 31
2013
$
1,769
2012
$
2,876
Year Ended
December 31
2012
$
2013
$
14,385
13,490
(in thousands of dollars)
Net income from continuing operations
Adjustments:
Depreciation and amortization
Finance expense
Income tax expense
EBITDA
Share-based compensation
Loss (gain) on disposal of property, plant & equipment
Gain on settlement of preferred shares
Impairment of assets
Adjusted EBITDA
1,077
97
769
3,712
157
106
-
-
3,975
931
153
1,089
5,049
145
10
-
182
5,386
Adjusted EBITDA as a percentage of revenue
11%
12%
The following table presents the calculation of funds from continuing operations.
(in thousands of dollars)
Net income from continuing operations
Add (deduct) items not affecting cash:
Depreciation and amortization
Deferred tax (recovery) expense
Loss (gain) on disposal of property, plant & equipment
Gain on settlement of preferred shares
Share-based compensation
Impairment of assets
Non-cash proceeds on settlement of claims
Other
Funds from continuing operations
Fourth Quarter Ended
December 31
2013
$
1,769
1,077
(442)
106
-
157
-
-
-
2,667
2012
$
2,876
931
120
10
-
145
182
-
(97)
4,167
3,991
446
6,048
24,870
624
106
-
-
25,600
16%
2013
$
14,385
3,991
(693)
106
-
624
-
-
-
18,413
3,673
770
4,744
22,677
575
(246)
(670)
182
22,518
13%
Year Ended
December 31
2012
$
13,490
3,673
(412)
(246)
(670)
575
182
(1,348)
(92)
15,152
2011
$
3,454
4,317
1,272
1,154
10,197
508
(356)
-
-
10,349
8%
2011
$
3,454
4,317
185
(356)
-
508
-
-
309
8,417
23
Management’s Discussion and Analysis
The following table presents the calculation of working capital.
(in thousands of dollars)
Current assets
Current liabilities
Working capital
The following table presents the calculation of net debt.
(in thousands of dollars)
Long term debt (including current portion)
Bank indebtedness
Less: cash and cash equivalents
Net debt
The following table presents the calculation of net cash.
(in thousands of dollars)
Cash and cash equivalents
Less: Bank indebtedness
Less: Long term debt (including current portion)
Net cash
December 31, 2013
$
70,004
22,160
47,844
December 31, 2013
$
3,736
-
(18,882)
n/a
December 31, 2013
$
18,882
-
(3,736)
15,146
The following table presents the calculation of return on capital employed.
December 31, 2011
$
47,873
24,486
23,387
As at
December 31, 2012
$
57,728
26,073
31,655
As at
December 31, 2012
$
December 31, 2011
$
6,274
-
(1,707)
4,567
4,762
-
(4,846)
n/a
As at
December 31, 2012
$
December 31, 2011
$
1,707
-
(6,274)
n/a
4,846
-
(4,762)
84
As at
(in thousands of dollars)
Adjusted EBITDA
Average capital employed:
Shareholders’ equity
Bank indebtedness
Long term debt (including current portion)
Preferred shares (including current portion)
Less: cash and cash equivalents
Average capital employed
Return on capital employed
(Adjusted EBITDA/Average capital employed)
December 31, 2013
$
25,600
December 31, 2012
$
22,518
December 31, 2011
$
10,349
95,292
-
4,291
-
(11,822)
87,761
29%
80,010
-
5,518
2,591
(3,277)
84,842
27%
71,892
4,283
8,703
5,182
(1,906)
88,154
12%
24
In addition to the factors noted above, management
cautions readers that the current economic environment
could have a negative impact on the markets in which the
Company operates and on the Company’s ability to
achieve its financial targets. Factors such as continuing
global economic uncertainty, tighter lending standards,
volatile capital markets, fluctuating commodity prices,
and other factors could negatively impact the demand for
the Company’s products and the Company’s ability to
grow or sustain revenues and earnings. Fluctuations in
conversion rates of the US dollar to Canadian dollar and
euro to Canadian dollar also have the potential to impact
the Company’s revenues and earnings.
The Company believes that the expectations reflected in
the forward-looking statements are reasonable, but no
assurance can be given that these expectations will prove
to be correct and such forward-looking statements
included in this report should not be unduly relied upon.
The forward-looking statements in this report speak only
as of the date of this report. The Company does not
undertake to update any forward-looking statement,
whether written or oral, that may be made from time to
time by the Company or on the Company’s behalf,
whether as a result of new information, future events, or
otherwise, except as may be required under applicable
statements
securities
contained in this document are expressly qualified by this
cautionary statement.
forward-looking
laws.
The
Management’s Discussion and Analysis
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
This document contains
forward-looking statements
under the heading “Outlook” and elsewhere concerning
future events or the Company’s future performance,
including the Company’s objectives or expectations for
revenue and earnings growth,
income taxes as a
percentage of pre-tax income, business opportunities in
the Petroleum Products, Water Products, Corrosion
Products markets, efforts to reduce administrative and
production costs, manage production levels, anticipated
capital expenditure trends, activity in the petroleum and
other industries and markets served by the Company and
the sufficiency of cash flows and credit facilities available
to cover normal operating and capital expenditures.
Forward-looking statements are often, but not always,
identified by the use of words such as “seek,”
“anticipate,” “plan,” “continue,” “estimate,” “expect,”
“potential,”
“may,”
“targeting,”
“should,”
“believe” and similar expressions. Actual events or results
in the
may differ materially from those reflected
Company’s forward-looking statements due to a number
of known and unknown risks, uncertainties and other
factors affecting the Company’s business and the
industries the Company serves generally.
“project,”
“predict,”
“intend,”
“might,”
“could,”
“will,”
These factors include, but are not limited to, fluctuations
in the level of capital expenditures in the Petroleum
Products, Water Products, and Corrosion Products
markets, drilling activity and oil and natural gas prices,
and other factors that affect demand for the Company’s
products and services, industry competition, the need to
effectively integrate acquired businesses, uncertainties as
its business
to the Company’s ability to implement
strategy effectively, political and economic conditions, the
Company’s ability to attract and retain key personnel, raw
material and labour costs, fluctuations in the US dollar,
euro and Canadian dollar exchange rates, and other risks
and uncertainties described under the heading “Risk
Factors”
recent Annual
Information Form, and elsewhere in this document and
other documents filed with Canadian provincial securities
authorities. These documents are available to the public
at www.sedar.com.
financial
The
statements have been prepared
in accordance with
International Financial Reporting Standards and the
reporting currency is in Canadian dollars.
the Company’s most
consolidated
in
25
Consolidated Financial Statements
ZCL Composites Inc.
Consolidated Financial Statements and Notes
For the years ended December 31, 2013 and 2012
26
Consolidated Financial Statements
March 7, 2014
MANAGEMENT’S REPORT
The Annual Report, including the consolidated financial statements and other financial information, is the responsibility of the
management of the Company. The consolidated financial statements were prepared by management in accordance with
International Financial Reporting Standards. When alternative accounting methods exist, management has chosen those it
considers most appropriate in the circumstances. The significant accounting policies used are described in note 3 to the
consolidated financial statements. The integrity of the information presented in the financial statements, including estimates
and judgments relating to matters not concluded by year end, is the responsibility of management. Financial information
presented elsewhere in this Annual Report has been prepared by management and is consistent with the information in the
consolidated financial statements.
Management is responsible for the establishment and maintenance of systems of internal accounting and administrative
controls which are designed to provide reasonable assurance that the financial information is accurate and reliable, and that
the Company's assets are appropriately accounted for and adequately safeguarded. The internal control system also includes
an established business conduct policy that applies to all employees. Management believes the system of internal controls,
review procedures, and established policies provide reasonable assurance as to the reliability and relevance of the financial
reports.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities and for final approval of the
annual consolidated financial statements. The Board appoints an Audit Committee consisting of unrelated, non-management
directors that meets at least four times each year under a written mandate from the Board. The Audit Committee meets with
management and with the independent auditors to satisfy itself that they are properly discharging their responsibilities,
reviews the consolidated financial statements and the Auditors' Report, including the quality of the accounting principles and
significant judgments applied, and examines other auditing and accounting matters. The Committee also recommends the
firm of external auditors to be appointed by the shareholders. The independent auditors have full and unrestricted access to
the Audit Committee, with and without management being present. The consolidated financial statements and other financial
information have been reviewed by the Audit Committee and approved by the Board of Directors of ZCL Composites Inc.
The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, Chartered
Accountants, in accordance with generally accepted auditing standards on behalf of the shareholders. The Auditors' Report
outlines the nature of their examination and their opinion on the consolidated financial statements of the Company.
“Ron Bachmeier”
Ronald M. Bachmeier
President and CEO
“Kathy Demuth”
Katherine L. Demuth
Chief Financial Officer
27
Consolidated Financial Statements
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of ZCL Composites Inc.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of ZCL Composites Inc., which comprise the
consolidated balance sheets as at December 31, 2013, and 2012, and the consolidated statements of income, comprehensive
income, and shareholders’ equity and cash flows for the years ended December 31, 2013 and 2012, and a summary of
significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of ZCL
Composites Inc. as at December 31, 2013, and 2012, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
Edmonton, Canada
March 7, 2014
Chartered accountants
28
Consolidated Financial Statements
Consolidated Balance Sheets
As at
(in thousands of dollars)
ASSETS
Current
Cash and cash equivalents
Accounts receivable [note 21]
Inventories [note 5]
Income taxes recoverable
Prepaid expenses
Property, plant and equipment [note 7]
Intangible assets [note 8]
Goodwill [note 25]
Restricted cash
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities [note 21]
Dividends payable [note 14]
Income taxes payable
Deferred revenue
Current portion of provisions [note 10]
Current portion of long term debt [note 11]
Deferred tax liabilities [note 17]
Long term portion of provisions [note 10]
Long term debt [note 11]
TOTAL LIABILITIES
Shareholders' equity
Share capital [note 15]
Contributed surplus [note 16]
Accumulated other comprehensive loss
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
December 31,
2013
$
December 31,
2012
$
18,882
25,083
23,810
1,379
850
70,004
27,254
4,934
31,547
268
308
134,315
14,671
896
73
3,779
1,391
1,350
22,160
4,075
936
2,386
29,557
74,846
2,301
(3,808)
31,419
104,758
134,315
4,846
28,469
22,657
841
915
57,728
26,093
6,361
29,671
249
424
120,526
17,274
580
1,467
3,409
1,993
1,350
26,073
4,597
609
3,412
34,691
70,980
2,609
(8,027)
20,273
85,835
120,526
On behalf of the Board: Director Director
29
Consolidated Financial Statements
Consolidated Statements of Income
For the years ended December 31,
(in thousands of dollars, except per share amounts)
Revenue
Manufacturing and selling costs [note 6]
Gross profit
General and administration
Foreign exchange (gain) loss
Depreciation and amortization [notes 7 and 8]
Finance expense [note 20]
Loss (gain) on disposal of property, plant and equipment
Impairment of property, plant and equipment [note 7]
Gain on redemption of preferred shares [note 12]
Other items [note 12]
Income before income taxes
Income tax expense (recovery) [note 17]
Current
Deferred
Net income
Earnings per share [note 18]
Basic
Diluted
See accompanying notes
2013
$
161,704
128,222
33,482
8,552
(46)
3,991
446
106
—
—
—
13,049
20,433
6,741
(693)
6,048
2012
$
170,359
140,440
29,919
8,571
43
3,673
770
(246)
182
(670)
(638)
11,685
18,234
5,156
(412)
4,744
14,385
13,490
$0.49
$0.49
$0.47
$0.46
30
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(in thousands of dollars)
Net income
Translation of foreign operations
Total items that will be reclassified subsequently to net income
Comprehensive income
Consolidated Statements of Shareholders’ Equity
For the years ended December 31,
Common
Shares
#
Share
Capital
$
Contributed
Surplus
$
29,035
70,980
2,609
(in thousands)
Balance, December 31, 2012
Share-based payments
[note 16]
—
—
813
Shares issued on exercise of
options [notes 15 and 16]
Reclassification of fair value of
stock options previously
expensed [note 16]
—
Translation of foreign operations —
Dividends declared [note 14]
—
—
Net income
29,848
Balance, December 31, 2013
2,934
932
—
—
—
74,846
624
—
(932)
—
—
—
2,301
2013
$
14,385
4,219
4,219
18,604
2012
$
13,490
(954)
(954)
12,536
Equity
Component
of Pref.
Shares
$
Accumulated
Other
Comprehensive Retained
Earnings
$
Loss
$
Total
$
—
—
—
—
—
—
—
—
(8,027)
20,273
85,835
—
—
—
—
624
2,934
—
4,219
—
—
(3,808)
—
—
(3,239)
14,385
31,419
—
4,219
(3,239)
14,385
104,758
28,802
69,862
2,177
845
(7,073)
8,373
74,184
Balance, December 31, 2011
Share-based payments
[note 16]
—
233
Shares issued on exercise of
options [notes 15 and 16]
Reclassification of fair value of
stock options previously
expensed [note 16]
Redemption of preferred
shares [note 12]
—
Translation of foreign operations —
Dividends declared [note 14]
—
—
Net income
Balance, December 31, 2012
29,035
See accompanying notes
—
—
847
575
—
271
(271)
—
—
—
—
70,980
128
—
—
—
2,609
—
—
—
(845)
—
—
—
—
—
—
—
—
—
—
575
847
—
—
(954)
—
—
(8,027)
—
—
(1,590)
13,490
20,273
(717)
(954)
(1,590)
13,490
85,835
31
Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of dollars)
CASH FLOWS FROM OPERATIONS
Net income from operations
Add (deduct) items not affecting cash:
Depreciation and amortization [notes 7 and 8]
Deferred tax recovery
Share-based compensation expense [note 16]
Loss (gain) on disposal of property, plant and equipment
Impairment of property, plant and equipment [note 7]
Gain on redemption of preferred shares [note 12]
Non-cash proceeds on settlement of claims [note 12]
Other
Funds from operations
Changes in non-cash working capital:
Decrease (increase) in accounts receivable
(Increase) decrease in inventories
Decrease (increase) in prepaid expenses
(Decrease) increase in accounts payable, accrued liabilities and provisions
Increase (decrease) in deferred revenue
(Decrease) increase in income taxes payable
Total changes in non-cash working capital
Cash flows from operations
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of common shares on the exercise of stock options [notes 15 and 16]
Dividends paid [note 14]
Advance on long term debt, net of financing charges
Repayment of long term debt
Redemption of preferred shares [note 12]
Cash flows used in financing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment [note 7]
Disposal of property, plant and equipment
Purchase of intangible assets [note 8]
Cash flows used in investing activities
Foreign exchange gain (loss) on cash held in foreign currency
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
See accompanying notes
2013
$
14,385
3,991
(693)
624
106
—
—
—
—
18,413
4,931
(24)
95
(3,780)
134
(1,877)
(521)
17,892
2,934
(2,923)
—
(1,350)
—
(1,339)
(3,010)
125
(80)
(2,965)
448
14,036
4,846
18,882
2012
$
13,490
3,673
(412)
575
(246)
182
(670)
(1,348)
(92)
15,152
(8,802)
1,319
(21)
3,064
(1,857)
942
(5,355)
9,797
847
(1,010)
2,000
(3,376)
(2,075)
(3,614)
(2,982)
247
(75)
(2,810)
(234)
3,139
1,707
4,846
32
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the years ended December 31, 2013 and 2012
1. CORPORATE INFORMATION
ZCL Composites Inc. (the “Company”) is a public company incorporated and domiciled in Canada and its common stock trades
on the Toronto Stock Exchange. The address of the Company’s registered office is 1420 Parsons Road S.W., Edmonton,
Alberta, Canada, T6X 1M5. The Company is principally involved in the manufacturing and distribution of liquid storage
systems, including fibreglass underground and aboveground storage tanks, dual-laminate composite tanks and related
products, services and accessories. The Company also produces and sells in-situ fibreglass tank and tank lining systems and
three dimensional glass fabric material.
2. BASIS OF PRESENTATION
The consolidated financial statements are reported in Canadian dollars which is the functional currency of the Company, ZCL
Composites Inc.
Statement of Compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and were authorized for
issue by the Board of Directors on March 7, 2014.
Basis of Consolidation
The consolidated financial statements of the Company include the accounts of ZCL Composites Inc. and its wholly-owned
subsidiaries including Parabeam Industries BV (“Parabeam”), Radigan Insurance Inc., ZCL International SRL, ZCL-Dualam Inc.
(“ZCL Dualam”), C.P.F. Dualam (U.S.A.) Inc. (“CPF”), Troy Mfg. (Texas), Inc. (“Troy Texas”) and Xerxes Corporation (“Xerxes”).
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and
continue to be consolidated until the date that such control ceases. On acquisition, the assets, liabilities and contingent
liabilities of a subsidiary are measured at their fair values. Any excess of the cost over the fair values of the identifiable net
assets acquired is recognized as goodwill. The financial statements of the subsidiaries are prepared for the same reporting
period as the parent company using consistent accounting policies. All intra-group balances, income and expenses, unrealized
gains and losses and dividends resulting from intra-group transactions are eliminated in full.
3. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
Cash and cash equivalents consist of cash balances and highly liquid investments with original maturities of three months or
less. Cash equivalents are invested in money market funds and guaranteed investment certificates and are readily
convertible into a known amount of cash and are subject to an insignificant risk of change in value.
Inventories
Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present
location and condition are accounted for as follows:
•
•
Raw materials: purchase cost determined on an average cost basis.
Finished goods and work in progress: cost of direct materials, labour and a proportionate share of variable and fixed
production overhead expenses allocated based on a normal operating capacity for direct labour hours.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and
the estimated costs necessary to make the sale.
33
Notes to the Consolidated Financial Statements
Property, plant and equipment
Property, plant and equipment are stated at historical cost, net of accumulated depreciation and accumulated impairment
losses, if any. Such costs include the cost of replacing property, plant and equipment as well as capitalized interest costs on
qualifying assets. When significant parts of property, plant and equipment are required to be replaced in intervals or major
inspections are required, the Company recognizes such costs as individual components of an asset and depreciates them
according to their specific useful lives.
Land is not depreciated and leasehold improvements are depreciated using the straight-line method over the term of the
lease. Depreciation for the remainder of property, plant and equipment is calculated using the declining balance method
using the following rates:
Buildings 4%
Land improvements 10%
Manufacturing equipment 10%
Office equipment 20-30%
Automotive equipment
30%
An item of property, plant and equipment and any significant component initially recognized is derecognized upon disposal or
when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition is
included in the consolidated statements of income when the asset is derecognized. The useful lives, residual values and
methods of depreciation of property, plant and equipment are reviewed at each year end and adjusted prospectively, if
appropriate.
Impairment of non-financial assets
Assets that have an indefinite useful life, for example, goodwill, are not subject to amortization and are tested annually for
impairment or more frequently if events or changes in circumstances indicate that the carrying amount may not be
recoverable. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by
which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use. The fair value less costs to sell calculation is based on available data from binding
sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for
disposing of the asset. The value in use calculation is based on a discounted cash flow model. The recoverable amount is
most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and
the growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the
different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 25.
For the purposes of assessing impairment, assets are grouped into cash-generating units (“CGUs”). Non-financial assets other
than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. CGUs
are the smallest identifiable group of assets that generate cash flows that are independent of the cash flows of other groups
of assets. The determination of CGUs was based on management’s judgments in regard to the geographic location of
operating divisions, product groups and shared infrastructure.
Intangible assets
Internally developed intangible assets – deferred development costs:
Development costs that are directly attributable to the design and testing of identifiable and unique products controlled by
the Company are recognized as intangible assets when the following criteria are demonstrated:
The technical feasibility of completing the intangible asset so it will be available for use or sale;
The intention to complete the intangible asset and use or sell it;
The ability to use or sell the intangible asset;
•
•
•
• How the intangible asset will generate probable future economic benefits;
•
The availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset; and
The ability to measure reliably the expenditure attributable to the intangible asset during its development.
•
34
Notes to the Consolidated Financial Statements
Expenditures on research activities are recognized as an expense in the period in which they are incurred.
The amount initially recognized for internally developed intangible assets is the sum of the expenditures incurred from the
date when the intangible asset first meets the recognition criteria listed above. Where no internally developed intangible
asset can be recognized, development expenditures are recognized as an expense in the period in which they are incurred.
Subsequent to initial recognition, internally developed intangible assets are reported at cost less accumulated amortization
and impairment losses, if any. Internally developed software is amortized over the expected life of ten years.
Acquired intangible assets:
Acquired intangible assets include non-contractual customer relationships, brands, licenses, patents, customer backlog, air
permits and non-patented technology. The cost of intangible assets acquired in a business combination are their fair values at
the dates of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization
and accumulated impairment losses, if any. The estimated useful lives are as follows:
Non-contractual customer relationships
Brands
Licenses
Patents
Air permits
Non-patented technology
Software
Estimated life of the relationship (three to ten years)
Expected life of the brand (ten years)
Term of the license agreement (three to nine years)
Life of the patent (six years)
Life of the permit (five years)
Expected life of related products (five years)
Expected life of the software system (ten years)
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is
an indication that the intangible asset may be impaired. The amortization period and method for an intangible asset with a
finite useful life is reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern
of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or
method, as appropriate, and are treated as changes in accounting estimates.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the
aggregate of the consideration transferred, measured at the acquisition date, in addition to the fair value of any non-
controlling interest in the acquired. All acquisition costs are expensed as incurred. Any contingent consideration expected to
be paid will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent
consideration will be recognized in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”. When
the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and
designation in accordance with contractual terms, economic circumstances and pertinent conditions as at the acquisition
date.
Goodwill is initially measured at cost, being the excess of the consideration transferred over the Company’s net identifiable
assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary
acquired, the difference is recognized as a gain for the period.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is assigned to the
Company’s CGUs that are expected to benefit from the combination, irrespective of whether the assets and liabilities of the
acquired are assigned to that (those) CGU(s). If a business unit is disposed of, goodwill disposed of is measured based on the
relative values of the operation disposed of and the portion of the CGU retained.
35
Notes to the Consolidated Financial Statements
Provisions
General:
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources will occur and a reliable estimate of the obligation can be made. Where the Company
expects to be reimbursed for any part of a provision, the reimbursement is recognized as a separate asset only when the
reimbursement is virtually certain, otherwise the circumstances of the reimbursement are disclosed as a contingency.
Expenses relating to a provision are presented in the consolidated statements of income net of any recognized
reimbursement.
Self-insured liabilities:
The Company self-insures certain risks related to pollution protection provided on certain product sales, general liability
claims and US workers’ compensation through Radigan Insurance Inc., its captive insurance company. The provision for self-
insured liabilities includes estimates of the costs of reported and expected claims based on estimates of losses using
assumptions determined by a certified reserve analyst.
Warranty:
The Company generally warrants its products for a period of one year after sale for materials and workmanship, and for up to
30 years for corrosion, if the products are properly installed and used solely for storage of specified liquids. A number of
component materials and parts are similarly warranted by their manufacturers, thereby offsetting the Company’s exposure to
warranty claims.
The Company’s complete storage systems marketed under the Prezerver trademark carry an enhanced 10 year, insurance-
backed warranty covering product replacement and pollution protection up to the limits of the policy. The Prezerver
warranty is covered by insurance underwritten by a major international insurer for Prezerver storage systems installed before
December 1, 2006. The Prezerver warranty for qualifying storage systems installed thereafter is insured through the
Company’s captive insurance company, Radigan Insurance Inc. The Company also carries general liability insurance including
product pollution coverage.
The Company’s warranty provision is based on a review of products sold and historical warranty cost experienced. Provisions
for warranty costs are charged to the consolidated statements of income and revisions to the estimated provision are
charged to the consolidated statements of income in the period in which they occur.
Foreign currency translation
The Company’s consolidated financial statements are presented in Canadian dollars and this is also the Company’s functional
currency. The functional currency of each of the Company’s subsidiaries is determined and the financial statements of each
entity are measured using that functional currency. The determination of functional currency is based on management’s
judgments with regard to the main settlement currency for the entity’s sales, labour costs and major materials. In addition,
management also considers factors such as the currency of the entity’s financing activities, the autonomy of foreign
operations and the proportion of the foreign operation’s transactions that are with the subsidiary companies.
Subsidiaries:
The assets and liabilities of foreign subsidiaries whose functional currencies are not denominated in Canadian dollars are
translated into Canadian dollars at the rate of exchange prevailing at the reporting date and their statements of income are
translated at the exchange rates prevailing at the date of the transactions. Exchange differences arising on the translation of
foreign subsidiaries are recognized in other comprehensive income. Any goodwill arising on the acquisition of a foreign
subsidiary and any fair value adjustments to the carrying value of assets and liabilities arising on acquisition and are treated as
assets and liabilities of the foreign subsidiary and are translated into Canadian dollars at the rate of exchange prevailing on
the reporting date. Parabeam’s functional currency is the euro and the functional currency of all other subsidiaries is the US
dollar with the exception of ZCL Dualam.
Foreign transactions and balances:
When the Company or one of its subsidiaries transacts in a currency other than its functional currency, the transaction is
measured initially at the closing rate at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the functional currency closing rate at a reporting period with the differences being recorded in
36
Notes to the Consolidated Financial Statements
the consolidated statements of income. Non-monetary assets and liabilities are measured in terms of historical costs and are
translated using the exchange rates in existence at the date of the initial transaction.
Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue
can be reliably measured. Revenue is measured at the fair value of the consideration received.
Sale of tanks and related products:
Revenue from the sale of tanks and related products is recognized when the significant risks and rewards of ownership of the
goods have passed to the buyer. Risks and rewards are generally transferred upon delivery of the goods, however there are
circumstances where the buyer accepts the risks and rewards of ownership prior to accepting delivery of the goods which
also triggers revenue recognition.
Installation and field service contracts:
Revenue from installation and field service contracts is accounted for using the percentage of completion method. The stage
of completion of a transaction qualifying for percentage of completion revenue recognition is determined by the proportion
of costs incurred to date relative to the estimated total costs to complete the contract. Anticipated losses on transactions are
recognized as soon as they can be reliably estimated.
Up-front non-refundable license fees and royalty revenue:
Revenue from up-front non-refundable license fees is recognized on a straight-line basis over the term of the Company’s
obligation with respect to the related deliverables unless there is evidence that another method is more representative of the
stage of completion. Royalty revenue from the third party use of the Company’s technology is recognized in accordance with
the royalty agreement and when the revenue can be reliably measured.
Financial instruments
Financial assets:
The Company classifies financial assets as either fair value through profit or loss, held to maturity investments, loans and
receivables, available for sale financial assets or as derivatives designated as hedging instruments in effective hedge
arrangements as appropriate. The classification of a financial asset is determined at the time of initial recognition of the
asset. All financial assets are recognized initially at fair value plus transaction costs, except in the case of financial assets
recorded at fair value through profit and loss.
Financial assets at fair value through profit or loss:
The Company’s financial assets held at fair value through profit or loss consist of cash and cash equivalents and restricted
cash.
Loans and receivables:
The Company’s loans and receivables consist of accounts receivable and other assets. These assets are measured initially at
fair value on the consolidated balance sheets and subsequently they are carried at amortized cost using the effective interest
method less any related impairment losses.
Held to maturity investments:
As at December 31, 2013 and 2012, the Company did not have any held to maturity investments on the consolidated balance
sheets.
Available for sale financial instruments:
As at December 31, 2013 and 2012, the Company did not have any available for sale financial instruments on the consolidated
balance sheets.
Derivatives designated as hedging instruments:
As at December 31, 2013 and 2012, the Company did not have any derivatives designated as hedging instruments on the
consolidated balance sheets.
37
Notes to the Consolidated Financial Statements
Financial liabilities:
The Company classifies financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives
designated as hedging instruments in effective hedge arrangements. The classification of a financial liability is determined at
the time of initial recognition.
Loans and borrowings:
The Company’s loans and borrowings consist of accounts payable and long term debt. These liabilities are measured initially
at fair value plus transaction costs on the consolidated balance sheets and subsequently they are carried at amortized cost
using the effective interest method less any related impairment losses. Transaction costs are incremental costs directly
related to the acquisition of a financial asset or the issuance of a financial liability. The Company incurs transaction costs
primarily through the issuance of debt and classifies these costs with the long term debt. These costs are amortized using the
effective interest method over the life of the related debt instrument.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets if there is
a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to
realize the assets and settle the liabilities simultaneously.
Share-based payments
Equity-settled transactions:
Equity-settled share-based payments consist of stock options issued by the Board of Directors of the Company to directors
and employees of the Company. The cost of the stock options granted are measured at their fair value at the date on which
they were granted. Management has determined that the Black-Scholes option pricing model is the most appropriate option
pricing model to use given the nature of the Company’s stock options. For more information on the estimates and inputs
made by the Company, refer to note 16.
The cost of equity-settled transactions is recognized in the consolidated statements of income over the period in which the
service condition is fulfilled with the corresponding adjustment added to the contributed surplus account. No expense is
recognized for awards that do not vest. Where equity-settled transactions are cancelled by the Company, they are treated as
if they had vested and any unrecognized expense relating to the cancelled options is recognized in the consolidated
statements of income in that period.
Income taxes
Current income taxes:
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities.
Deferred taxes:
Deferred tax is accounted for using the liability method on temporary differences at the reporting date between the tax basis
of assets and liabilities and the carrying value for accounting purposes. Deferred tax liabilities are recorded for all temporary
differences other than:
• Where the temporary difference arises from the initial recognition of goodwill, or
• Where the temporary difference is associated with investments in subsidiaries and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused
losses to the extent that it is probable that the taxable income will be available against the deductible temporary difference
and can be utilized.
All deferred tax liabilities are measured at the tax rates that are expected to apply to the period in which the asset is realized
or the liability is settled, based on tax rates which have been enacted or substantively enacted by the end of the reporting
period.
38
Notes to the Consolidated Financial Statements
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and
timing of future taxable income. Given the wide range of international business relationships and the complexity of existing
contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such
assumptions, could necessitate future adjustments to income tax expense already recorded.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the
inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an
arrangement.
As a lessor
Leases in which the Company does not transfer substantially all the risks and benefits of ownership of an asset are classified
as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the
leased asset and recognized over the lease term on the same basis as rental income.
Gains on sale and lease back transaction, where fair value of lease is below sale value, is recognized in the consolidated
income statements when they are incurred.
4. NEW ACCOUNTING STANDARDS
Certain new standards, interpretations and amendments have been released by the IASB and were effective for annual
periods beginning on or after January 1, 2013. The Company has adopted the following new standards and interpretations in
these consolidated financial statements:
IFRS 10: “Consolidated Financial Statements”
This standard replaces Standing Interpretations Committee 12: "Consolidation-Special Purpose Entities," and parts of IAS 27:
"Consolidated and Separate Financial Statements." The new standard builds on existing principles by identifying the concept
of control as the determining factor in whether an entity should be included in the Company’s consolidated financial
statements. The standard provides additional guidance to assist in the determination of control where it is difficult to assess.
The adoption of this standard did not impact the current or prior periods presented in these consolidated financial
statements.
IFRS 12: “Disclosure of Interests with Other Entities”
The standard includes all of the disclosures that were previously included in IAS 27 “Consolidated and Separate Financial
Statements,” IAS 31: “Interests in Joint Ventures” and IAS 28: “Investment in Associates.” These disclosures relate to an
entity’s interests in subsidiaries, joint arrangements, associates and structured entities. The adoption of this standard did not
impact the current or prior periods presented in these consolidated financial statements.
IFRS 13: “Fair Value Measurement”
This standard does not change the requirements of using fair value, but rather, provides guidance on how to measure the fair
value of financial and non-financial assets and liabilities when required or permitted by IFRS. There are also additional
disclosure requirements. The adoption of this standard did not impact the current or prior periods presented in these
consolidated financial statements.
Standards issued but not yet effective:
Amendments to IFRS 7 and IAS 32: Offsetting Financial Assets and Financial Liabilities
Amendments to IFRS 7 require an entity to disclose information about rights to set-off and related arrangements (e.g.,
collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting
arrangements on an entity’s financial position. The new disclosures are required for all recognized financial instruments that
are set off in accordance with IAS 32: “Financial Instruments: Presentation.” The disclosures also apply to recognized financial
39
Notes to the Consolidated Financial Statements
instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether
they are set off in accordance with IAS 32. These amendments are effective for periods beginning on or after January 1, 2014
and the adoption of these amendments is not expected to impact the Company’s financial statements.
Amendments to IAS 32 clarify the meaning of “currently has a legally enforceable right to set-off.” These amendments are
effective for periods beginning on or after January 1, 2014 and the adoption of these amendments is not expected to impact
the Company’s financial statements.
5.
INVENTORIES
As at
(in thousands of dollars)
Raw materials
Work in progress
Finished goods
December 31,
2013
$
December 31,
2012
$
9,989
3,107
10,714
23,810
9,068
4,048
9,541
22,657
During the year ended December 31, 2013 there was a write-down of $56,000 (December 31, 2012 - $170,000) of inventory
to its net realizable value.
6. MANUFACTURING AND SELLING COSTS
For the years ended December 31,
(in thousands of dollars)
Raw materials and consumables used
Labour costs
Other costs
Net change in inventories of finished goods and
work in progress
2013
$
57,849
29,753
40,852
(232)
128,222
2012
$
58,150
31,152
49,302
1,836
140,440
40
Notes to the Consolidated Financial Statements
7. PROPERTY, PLANT AND EQUIPMENT
(in thousands of dollars)
Cost
As at December 31, 2011
Land
$
Buildings
$
Manufacturing Office
Equip.
$
Equip.
$
Leaseholds
$
Auto
Equip.
$
Total
$
6,313
8,052
3,226
20,148
3,546
408
41,693
Additions
Disposals
Impairment
Reclassification of assets from
held for sale
Foreign exchange
As at December 31, 2012
Additions
Disposals
Foreign exchange
As at December 31, 2013
—
(91)
—
255
(2)
6,475
—
—
4
6,479
88
(1,434)
—
691
(39)
7,358
361
—
113
7,832
517
—
—
—
(41)
3,702
312
—
150
4,164
2,100
(375)
(182)
—
(128)
21,563
1,980
(204)
783
24,122
119
(167)
—
—
(14)
3,484
290
(465)
62
3,371
158
(198)
—
—
(9)
359
67
—
34
460
2,982
(2,265)
(182)
946
(233)
42,941
3,010
(669)
1,146
46,428
Accumulated Depreciation
As at December 31, 2011
Depreciation
Disposals
Reclassification of assets from
held for sale
Foreign exchange
As at December 31, 2012
Depreciation
Disposals
Foreign exchange
As at December 31, 2013
Carrying Amount
As at December 31, 2012
As at December 31, 2013
—
—
—
—
—
—
—
—
—
—
1,827
1,446
9,580
2,599
158
15,610
227
(202)
178
(7)
2,023
212
—
20
2,255
316
—
—
(16)
1,746
399
—
69
2,214
1,111
(375)
—
(40)
10,276
1,214
(75)
334
11,749
297
(153)
—
(10)
2,733
359
(361)
53
2,784
82
(163)
—
(7)
70
88
—
14
172
289
288
2,033
(893)
178
(80)
16,848
2,272
(436)
490
19,174
26,093
27,254
6,475
6,479
5,335
5,577
1,956
1,950
11,287
12,373
751
587
Capital work in progress of $306,000 (December 31, 2012 - $321,000) is included above and not subject to depreciation.
Included in this figure is $54,000 for manufacturing equipment and $252,000 in buildings (improvements).
The $182,000 impairment loss recognized during the year ended December 31, 2012 related to the carrying value of an
internally developed mold for the Underground operating segment.
41
Notes to the Consolidated Financial Statements
8.
INTANGIBLE ASSETS
(in thousands of dollars)
Cost
As at December 31, 2011
Additions
Disposals
Foreign exchange
As at December 31, 2012
Additions
Disposals
Foreign exchange
As at December 31, 2013
Accumulated Amortization
As at December 31, 2011
Amortization
Foreign exchange
As at December 31, 2012
Amortization
Foreign exchange
As at December 31, 2013
Carrying Amount
As at December 31, 2012
As at December 31, 2013
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Other
$
Total
$
6,549
3,593
3,277
4,613
18,032
—
—
(136)
6,413
—
—
433
6,846
—
—
(67)
3,526
—
—
213
3,739
—
—
(38)
3,239
80
—
122
3,441
75
—
(22)
4,666
—
—
71
4,737
75
—
(263)
17,844
80
—
839
18,763
4,912
1,757
571
2,763
10,003
635
(104)
5,443
608
391
6,442
390
(33)
2,114
399
136
2,649
301
(8)
864
356
43
1,263
314
(15)
3,062
356
57
3,475
1,640
(160)
11,483
1,719
627
13,829
970
404
1,412
1,090
2,375
2,178
1,604
1,262
6,361
4,934
Other intangible assets include licenses, patents, air permits, non-patented technology and certification costs.
9. BANK INDEBTEDNESS – OPERATING CREDIT FACILITY
The Company’s operating credit facility was not in use at December 31, 2013 and December 31, 2012. Bank indebtedness
consists of amounts drawn under available credit facilities and cheques issued in excess of related cash and cash equivalent
balances. The Company has a maximum of $20 million of available credit under this operating credit facility. The operating
credit facility is repayable on demand and expires on May 31, 2015 however it is typically renewed on an annual basis with
the Company’s primary lender. The rate of interest charged on the operating credit facility for Canadian dollar balances is
prime plus 75 basis points. The rate of interest charged on the operating credit facility for US dollar balances is US prime plus
75 basis points.
The Company has pledged as general collateral for advances under the operating credit facility a general security agreement
on present and future assets, guarantees from each present and future direct and indirect subsidiary of the Company
supported by a first registered security over all present and future assets, and pledge of shares. The Company is not
permitted to sell or re-pledge significant assets held under collateral without consent from the lenders. The Company is
required to meet certain covenants as a condition of the debt agreements. At December 31, 2013, the Company was in
compliance with all restrictive covenants relating to the operating credit facility.
42
Notes to the Consolidated Financial Statements
10. PROVISIONS AND CONTINGENCIES
a) Provisions
(in thousands of dollars)
As at December 31, 2011
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2012
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2013
Warranty
$
Self-insured
liabilities
$
543
(522)
904
(9)
916
(390)
380
33
939
450
(30)
200
(11)
609
(45)
315
57
936
Other
$
641
(146)
593
(11)
1,077
(811)
162
24
452
Total
$
1,634
(698)
1,697
(31)
2,602
(1,246)
857
114
2,327
Of the $2,327,000 (2012 - $2,602,000) in provisions described above, the Company expects $1,391,000 (2012- $1,993,000) to
settle within 12 months of the balance sheet date, the remaining $936,000 (2012 - $609,000) of provisions are classified as
long term liabilities on the balance sheet.
The Company self-insures certain risks related to product liability, general liability coverage and US workers’ compensation
exposures through Radigan Insurance Inc., its captive insurance company. Management has accrued provisions related to its
self-insured liabilities based on reports from a certified reserve analyst as well as previous experience in dealing with similar
provisions. Although actual settlement amounts may differ from the provisions included in the Company’s consolidated
balance sheet, management does not expect these amounts to materially exceed the provisions accrued for self-insured
liabilities.
b) Contingencies
In the normal conduct of operations, various legal claims or actions are pending against the Company in connection with its
products and/or other commercial matters. The Company carries liability insurance, subject to certain deductibles and policy
limits, against such claims. Based on advice and information provided by legal counsel and the Company’s previous
experience with similar claims, management records provisions, if any, in the period in which uncertainty regarding such
matters is resolved and the amount of the loss can be reasonably estimated.
Due to the uncertainties in the nature of the Company's legal claims, such as the range of possible outcomes and the progress
of the litigation, the provisions accrued involve estimates and the ultimate cost to resolve these claims may exceed or be less
than those recorded in the consolidated financial statements. Management believes that the ultimate cost to resolve these
claims will not materially exceed the insurance coverage or provisions accrued and, therefore, would not have a material
adverse effect on the Company’s consolidated statements. Management reviews the timing of the outflows of these
provisions on a regular basis. Cash outflows for existing provisions are expected to occur within the next one to five years,
although this is uncertain and depends on the development of the specific circumstances. These outflows are not expected to
have a material impact on the Company’s cash flows.
43
Notes to the Consolidated Financial Statements
11. LONG TERM DEBT
As at
(in thousands of dollars)
Term loan
Total long term debt
Less current portion
December 31,
2013
$
December 31,
2012
$
3,736
3,736
1,350
2,386
4,762
4,762
1,350
3,412
Excluding financing costs, the principal balance of the term loan as at December 31, 2013 is $3,521,000 USD (December 31,
2012 – $4,818,000 USD) which is a reasonable estimate of its fair value.
The term loan requires monthly interest payments and quarterly principal repayments of $337,500 Canadian dollars, with the
balance due on maturity on May 31, 2015. The interest charged on the loan is the US dollar based 30 day LIBOR rate plus 225
basis points (effective rate of 2.41% as at December 31, 2013). The Company is also subject to mandatory prepayments of
outstanding principal equal to 100% of any net proceeds on asset disposals and insurance proceeds received by the Company.
The term loan is secured through a collateral mortgage over three properties owned by the Company. The carrying amount
of these three properties as at December 31, 2013 is $8,690,000.
The Company’s operating and term credit facilities are utilized as required throughout the year. Both credit facilities bear
interest at floating rates and changes in interest rates would affect the Company’s exposure to interest rate risk in servicing
the facilities. For additional information regarding the Company’s exposure to market fluctuations in interest rates, refer to
note 21.
12. PREFERRED SHARES
On June 15, 2012, the Company redeemed all outstanding convertible preferred shares that were issued by a subsidiary of
the Company to the vendor on the acquisition of ZCL Dualam on January 4, 2010. A total of 1,078,947 convertible preferred
shares, which had a repayment term of five years and a cumulative preferred dividend of 4.4%, were redeemed. When
issued, the Company recognized a liability of $5,125,000, its fair value, on the balance sheet as well as an $845,000 addition
to shareholders’ equity, which represented the fair value of the conversion options at the time the convertible preferred
shares were issued.
The preferred shares were redeemed for consideration of $5,173,000. The consideration was issued through cash
disbursement and by applying proceeds on the sale of properties and settlement of outstanding claims against the vendor.
The break-down of the consideration is as follows:
Cash payment to the vendor
Fair value of land and buildings transferred
Applied proceeds on the settlement of outstanding claims with the vendor
Total consideration issued
$2,075,000
1,750,000
1,348,000
$5,173,000
At the time of the settlement, the estimated fair value of the convertible preferred shares was $6,362,000; $5,354,000
related to the fair value of the liability portion and $1,008,000 related to the fair value of the conversion option on the
convertible preferred shares. The Company allocated the consideration against both the liability and equity components of
the convertible preferred shares using the same methodology as was used when initially establishing the accounting for the
liability and equity components. This resulted in a gain of $670,000 in the consolidated statement of income for the year
ended December 31, 2012 and an increase to contributed surplus of $128,000.
The land and buildings had a carrying value of $1,502,000 and the disposal resulted in a gain of $248,000 in the consolidated
statement of income for the year ended December 31, 2012. One of the properties disposed of as part of this transaction
was previously recorded as an asset held for sale on the Company’s consolidated balance sheet.
44
Notes to the Consolidated Financial Statements
The applied proceeds on the settlement of outstanding claims represented amounts that the Company had claimed in
relation to past or future anticipated cash disbursements that were incurred, or may be incurred by the Company on issues
relating to periods prior to the acquisition of ZCL Dualam. The amounts that were previously paid in prior periods, that have
now been recovered, have been recorded as a recovery of expenses in the other items line in the consolidated statement of
income for the year ended December 31, 2012. The remainder was included in provisions as at December 31, 2012.
13. COMMITMENTS
Lease Commitment
The Company’s minimum annual payments under the terms of all operating leases are as follows:
(in thousands of dollars)
2014
2015
2016
2017
2018
Thereafter
Other Contractual Obligations
$
2,449
1,490
1,157
756
336
—
6,188
The Company has provided a letter of credit in the amount of $1.0 million (2012 - $1.0 million) to secure a line of credit for
the same amount for the US operations. The Company has also provided two letters of credit for a total of $0.7 million (2012
- $0.4 million) to secure claims for the Company’s US workers’ compensation program. In the normal course of business, the
Company provides letters of credit as collateral for contract performance guarantees. As at December 31, 2013 the issued
performance letters of credit totalled $1.4 million (2012 - $1.5 million).
14. DIVIDENDS
Dividends declared for years ended December 31,
(in thousands of dollars, except per share amounts)
Declared
March 7, 2013
May 3, 2013
August 8, 2013
November 7, 2013
2013
Paid to
Per
share
shareholders
$0.025 April 15, 2013
$0.025
July 15, 2013
$0.030 October 15, 2013
$0.030
January 15, 2014
$0.110
Total
$
729
729
885
896
3,239
For the year ended December 31, 2013,
Payable, beginning of period
Declared
Paid in cash
Payable, end of period
2012
Declared
March 7, 2012
May 8, 2012
August 3, 2012
November 8, 2012 0.020
0.055
Paid to
shareholders
Per
share
0.010 April 2, 2012
0.010
July 16, 2012
0.015 October 15, 2012
January 15, 2013
Total
$
288
288
434
580
1,590
2013
$
580
3,239
(2,923)
896
2012
$
—
1,590
(1,010)
580
On March 7, 2014, the Company’s Board of Directors declared a dividend of $0.035 per common share to be paid on April 15,
2014 to the shareholders of record as of March 31, 2014.
45
Notes to the Consolidated Financial Statements
15. SHARE CAPITAL
Authorized
Unlimited number of common shares with no par or stated value.
Issued and outstanding
During the year ended December 31, 2013, the Company issued 812,917 (2012 – 232,983) common shares at an average rate
of $3.61 per share for options exercised resulting in cash proceeds to the Company of $2,934,000 (2012 - $847,000). As at
December 31, 2013, the Company had 29,847,919 common shares outstanding (December 31, 2012 – 29,035,002).
16. SHARE BASED PAYMENTS
The Black-Scholes option pricing model, used by the Company to calculate the values of options, as well as other currently
accepted option valuation models, was developed to estimate the fair value of freely-tradeable, fully-transferable options.
These models require subjective assumptions, including future share price volatility and expected time until exercise, which
affect the calculated values.
Under the Company’s stock option plan, options to purchase common shares may be granted by the Board of Directors to
directors, employees, and persons who provide management or consulting services to the Company. The shareholders
authorized the number of options that may be granted under the plan to not exceed 10% of the issued and outstanding
shares of the Company on a non-diluted basis provided that the number of listed securities that may be reserved for issuance
under stock options granted to any one individual or insiders of the Company not exceed 5% of the Company’s issued and
outstanding securities. The exercise price of options granted cannot be less than the closing market price of the Company’s
common shares on the last trading day preceding the grant. The Company’s Board of Directors may determine the term of
the options but such term cannot be greater than five years from the date of issuance. Vesting terms, eligibility of qualifying
individuals to receive options and the number of options issued to individual participants are determined by the Company’s
Board of Directors. The plan has no cash settlement features. Options generally expire 90 days from the date on which a
participant ceases to be a director, officer, employee, management company employee or consultant of the Company.
As at December 31, 2013, the Company has 1,929,261 (2012 – 2,424,349) options outstanding, which expire on dates
between January 2015 and December 2018. The outstanding options vest evenly over a three-year period commencing on
the anniversary of the original grant date. As at December 31, 2013, 796,360 (2012 – 959,269) of the outstanding options
were vested and exercisable into common shares. The following table presents the changes to the options outstanding
during each of the fiscal years:
For the years ended December 31,
Balance, as at January 1
Granted
Exercised
Forfeited
Expired
Balance, as at December 31
2013
2012
Stock
options
#
2,424,349
444,000
(812,917)
(126,171)
—
1,929,261
Weighted
average
exercise price
$
3.74
7.09
3.61
3.72
—
4.56
Stock
options
#
2,207,498
597,000
(232,983)
(147,166)
—
2,424,349
Weighted
average
exercise price
$
3.44
4.72
3.63
3.54
—
3.74
46
Notes to the Consolidated Financial Statements
2013
Options Outstanding
Weighted
Average
Exercise
Price
$
Weighted Average
Remaining
Contractual
Life in Years
#
3.87
4.09
3.05
3.23
3.15
4.72
7.09
4.56
1.02
1.19
2.19
2.40
2.93
3.95
4.93
3.34
2012
Options Exercisable
Weighted
Average
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
—
3.66
Stock
options
#
202,000
17,500
160,984
—
250,161
165,715
—
796,360
Options Outstanding
Options Exercisable
Weighted Weighted Average
Average
Exercise
Price
$
Remaining
Contractual
Life in Years
#
3.75
3.87
4.09
3.05
3.23
3.15
4.72
3.74
0.94
2.02
2.19
3.19
3.40
3.93
4.95
3.24
Weighted
Average
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
—
3.58
Stock
options
#
395,300
238,645
13,330
133,347
2,499
176,148
—
959,269
Stock
options
#
202,000
17,500
304,346
2,501
424,175
534,739
444,000
1,929,261
Stock
options
#
395,300
378,672
20,000
453,372
7,500
572,505
597,000
2,424,349
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
7.09
3.05 – 7.09
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
4.72
3.05 – 4.72
During the year ended December 31, 2013, 444,000 options were granted at an exercise price of $7.09. During the year
ended December 31, 2012, 597,000 options were granted at an exercise price of $4.72.
During the year ended December 31, 2013, 812,917 stock options (2012 – 232,983) were exercised with a weighted average
exercise price of $3.61 (2012 – $3.63) resulting in cash proceeds to the Company of $2,934,000 (2012 – $847,000).
Compensation expense previously included in contributed surplus of $932,000 (2012 – $271,000) was credited to share
capital on the exercise of stock options.
The Company uses the fair value method of accounting for all stock options granted to employees and directors. The fair
value of stock options at the date of grant or transfer is determined using the Black-Scholes option pricing model with
assumptions for risk-free interest rates, dividend yield, volatility factors of the expected market prices of the Company’s
common shares, expected forfeitures and an expected life of the instrument. Share-based compensation expense is
recognized using a graded vesting model. During the year ended December 31, 2013, share-based compensation expense of
$624,000 (2012 - $575,000) was recorded in manufacturing and selling costs and general and administration expenses in the
consolidated statements of income.
47
Notes to the Consolidated Financial Statements
The estimated fair values of stock options granted are determined at the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions resulting in a fair value per option of $1.80 (2012 – $1.37).
Risk-free interest rate (%)
Expected hold period to exercise (years)
Volatility in the price of the Company’s shares (%)
Forfeiture rate (%)
Dividend yield (%)
2013
1.4
3.9
35.7
5.0
1.7
2012
1.2
3.8
41.5
5.0
1.6
The expected hold period, volatility, forfeiture rate and dividend yield are based on management’s judgments in regard to the
Company’s past history and expectations for the future.
17. INCOME TAXES
The Company's effective income tax expense has been determined as follows:
(in thousands of dollars)
Net income before tax
Statutory federal and provincial taxes at 25.51% (2012 – 25.47%)
Increase (decrease) in income taxes resulting from:
Rate differences for foreign jurisdictions
Effect of permanent differences
Non-taxable foreign income, other tax exempt income and other items
At the effective income tax rate of 30% (2012 – 26%)
A reconciliation of the Company’s deferred tax liabilities is as follows:
(in thousands of dollars)
Balance, beginning of the year
Tax recovery during the year recognized in net income
Tax expense (recovery) during the year recognized in other
comprehensive loss
At the effective income tax rate of 30% (2012 – 26%)
Significant components of the Company’s deferred tax liabilities are as follows:
(in thousands of dollars)
Property, plant and equipment
Land
Intangible assets
Inventories
Refundable insurance premiums
Non-deductible reserves and accrued liabilities
Other
2013
$
2012
$
20,433
18,234
5,213
1,426
(765)
174
6,048
2013
$
4,597
(693)
171
4,075
2013
$
3,186
343
893
360
102
(805)
(4)
4,075
4,644
663
(624)
61
4,744
2012
$
5,068
(412)
(59)
4,597
2012
$
3,060
343
1,344
565
110
(871)
46
4,597
The Company had utilized all loss carry forwards for both Canadian and US tax purposes during the year ended December 31,
2012.
48
Notes to the Consolidated Financial Statements
18. EARNINGS PER SHARE
The following table sets forth the net income available to common shareholders and weighted-average number of common
shares outstanding for the computation of basic and diluted earnings per share:
For the year ended December 31,
Numerator (in thousands of dollars)
Net income
Denominator (in thousands)
Weighted average shares outstanding - basic
Effect of dilutive securities:
Stock options
Weighted average shares outstanding - diluted
19. RELATED PARTY TRANSACTIONS
a) Transactions in the normal course of operations:
2013
$
2012
$
14,385
13,490
2013
#
29,308
399
29,707
2012
#
28,860
265
29,125
Certain manufacturing components purchased for $27,000 (2012 - $31,000) for the year ended December 31, 2013, included
in manufacturing and selling costs in the consolidated statements of income or inventories, were provided by a corporation
whose Executive Chairman is a director of the Company. The transactions were incurred in the normal course of operations
and recorded at fair value being normal commercial rates for the products. Accounts payable and accrued liabilities at
December 31, 2013 included $1,000 (December 31, 2012 - $3,000) owing to the corporation. There are no ongoing
contractual or other commitments resulting from these transactions.
b) Transactions with key management and directors:
For the year ended December 31,
(in thousands of dollars)
Salaries, benefits and director fees
Share-based payments
Total
2013
$
1,538
252
1,790
2012
$
1,129
210
1,339
The Company has identified the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer as key
management to the Company in addition to the members of the board of directors. The figures above are included in general
and administrative expenses for the years ended December 31, 2013 and 2012. Share-based payments are the amount of
expense recognized in the consolidated statements of income relating to the identified key management and directors.
20. FINANCE EXPENSE
For the year ended December 31,
(in thousands of dollars)
Short term interest, net of interest income
Interest, long term obligations
2013
$
334
112
446
2012
$
573
197
770
49
Notes to the Consolidated Financial Statements
21. FINANCIAL INSTRUMENTS
Financial risk management
The Company’s activities expose it to a variety of financial risks including market risk (foreign exchange risk and interest rate
risk), credit risk and liquidity risk. Management reviews these risks on an ongoing basis to ensure that the risks are
appropriately managed. The Company may use foreign exchange forward contracts to manage exposure to fluctuations in
foreign exchange from time to time. The Company does not currently have a practice of trading derivatives and had no
derivative instruments outstanding at December 31, 2013 and 2012.
a)
Interest rate risk
The Company’s objective in managing interest rate risk is to monitor expected volatility in interest rates while also minimizing
the Company’s financing expense levels. Interest rate risk mainly arises from fluctuations of interest rates and the related
impact on the return earned on cash and cash equivalents, restricted cash and the expense on floating rate debt. On an
ongoing basis, management monitors changes in short term interest rates and considers long term forecasts to assess the
potential cash flow impact on the Company. The Company does not currently hold any financial instruments to mitigate its
interest rate risk. Cash and cash equivalents and restricted cash earn interest based on market interest rates. Bank
indebtedness balances and long term debt have floating interest rates which are subject to market fluctuations.
The effective interest rate on the bank indebtedness balance at December 31, 2013 was prime plus 75 basis points, 3.75%
(December 31, 2012 - prime plus 100 basis points, 4.00%) adjusted quarterly based on certain financial indicators of the
Company. The effective interest rate on the term loan balance at December 31, 2013 was US LIBOR rate plus 225 basis
points, 2.41% (December 31, 2012 – US LIBOR rate plus 250 basis points, 2.71%), adjusted quarterly based on certain financial
indicators of the Company. With other variables unchanged, an increase or decrease of 100 basis points in the US LIBOR and
Canadian prime interest rate as at December 31, 2013 would have a minimal impact on the net income for the year ended
December 31, 2013.
b) Foreign exchange risk
The Company operates on an international basis and is subject to foreign exchange risk exposures arising from transactions
denominated in foreign currencies. The Company’s objective with respect to foreign exchange risk is to minimize the impact
of the volatility related to financial assets and liabilities denominated in a foreign currency, where possible, through effective
cash flow management. Foreign currency exchange risk is limited to the portion of the Company’s business transactions
denominated in currencies other than Canadian dollars. The Company’s most significant foreign exchange risk arises primarily
with respect to the US dollar. The revenues and expenses of the Company’s US operations are denominated in US dollars.
Certain of the revenue and expenses of the Canadian operations are also denominated in US dollars. The Company is also
exposed to foreign exchange risk associated with the euro due to its operations in The Netherlands, however these amounts
are not significant to the Company’s consolidated financial results. On an ongoing basis, management monitors changes in
foreign currency exchange rates as well as considering long term forecasts to assess the potential cash flow impact on the
Company. During the year ended December 31, 2013, the Company converted US dollar cash to Canadian dollar cash to help
mitigate foreign exchange exposures resulting from fluctuations in exposed monetary assets and liabilities. The Company
continues to monitor its foreign exchange exposure on monetary assets.
The tables that follow provide an indication of the Company’s exposure to changes in the value of the US dollar relative to the
Canadian dollar as at and for the year ended December 31, 2013. The analysis is based on financial assets and liabilities
denominated in US dollars at the end of the period (“balance sheet exposure”), which are separated by domestic and foreign
operations, and US dollar denominated revenue and operating expenses during the period (“operating exposure”).
50
Notes to the Consolidated Financial Statements
Balance sheet exposure as at December 31, 2013,
(in thousands of US dollars)
Cash and cash equivalents
Accounts receivable
Restricted cash
Accounts payable and accrued liabilities
Trade balances with self-sustaining foreign entities
Long term debt
Net balance sheet exposure
Operating exposure for the year ended December 31, 2013,
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
Foreign
Operations
$
Domestic
Operations
$
9,347
16,252
250
(10,484)
—
—
15,365
168
1,536
—
(911)
464
(3,521)
(2,264)
Total
$
9,515
17,788
250
(11,395)
464
(3,521)
13,101
$
109,069
94,588
14,481
The weighted average US to Canadian dollar translation rate was 1.03 for the year ended December 31, 2013. The translation
rate as at December 31, 2013 was 1.07.
Based on the Company’s foreign currency exposures noted above, with other variables unchanged, a twenty percent
decrease in the Canadian dollar would have impacted net income as follows:
For the year ended December 31, 2013,
(in thousands of US dollars)
Net balance sheet exposure of other operations
Net operating exposure of foreign operations
Change in net income
$
(290)
1,853
1,563
Other comprehensive income would have changed $1,967,000 if the value of the Canadian dollar fluctuated by 20% due to
the net balance sheet exposure of financial assets and liabilities of foreign operations. The timing and volume of the above
transactions as well as the timing of their settlement could impact the sensitivity analysis.
c) Credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. The Company is exposed to credit risk through its cash and cash equivalents, restricted cash and
accounts receivable. The Company manages the credit risk associated with its cash and cash equivalents and restricted cash
by holding its funds with reputable financial institutions and investing only in highly rated securities that are traded on active
markets and are capable of prompt liquidation. Credit risk for trade and other accounts receivable are managed through
established credit monitoring activities. The Company also mitigates its credit risk on trade accounts receivable by obtaining a
cash deposit from certain customers with no prior order history with the Company or where the Company perceives the
customer has a higher level of risk.
The Company has a concentration of customers in the oil and gas and corrosion sectors. The concentration risk is mitigated by
the large number of customers and by a significant portion of the customers being large international organizations. As at
December 31, 2013, one customer exceeded 10% of the consolidated trade accounts receivable balance. The balance of
$3,927,000 USD was being disputed by the customer and it was settled for $3,527,000 USD subsequent to the year end. The
difference of $400,000 USD was included in the allowance for doubtful accounts at year end. Losses under trade accounts
receivable have not historically been significant. The creditworthiness of new and existing customers is subject to review by
51
Notes to the Consolidated Financial Statements
management by considering such items as the type of customer, prior order history and the size of the order. Decisions to
extend credit to new customers are approved by management and the creditworthiness of existing customers is monitored.
The Company reviews its trade accounts receivable regularly and amounts are written down to their expected realizable value
when the account is determined not to be fully collectable. This generally occurs when the customer has indicated an inability
to pay, the Company is unable to communicate with the customer over an extended period of time, and other methods to
obtain payment have been considered and have not been successful. The bad debt expense is charged to net income in the
period that the account is determined to be doubtful. Estimates for the allowance for doubtful accounts are determined on a
customer-by-customer evaluation of collectability at each reporting date, taking into account the amounts which are past due
and any available relevant information on the customers’ liquidity and going concern status. After all efforts of collection have
failed, the accounts receivable balance not collected is written off with an offset to the allowance for doubtful accounts, with
no impact on net income.
The Company’s maximum exposure to credit risk for trade accounts receivable is the carrying value of $24,723,000 as at
December 31, 2013 (December 31, 2012 - $27,338,000). On a geographic basis as at December 31, 2013, approximately 22%
(December 31, 2012 – 48%) of the balance of trade accounts receivable was due from Canadian and non-US customers and
78% (December 31, 2012 – 52%) was due from US customers. The change in geographic accounts receivable is mainly due to
the disputed significant receivable of $3,927,000 that was settled after the year ending December 31, 2013.
Payment terms are generally net 30 days. The aging of trade accounts receivable prior to including the allowance for doubtful
accounts were as follows:
As at December 31,
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due greater than 90 days
2013
45%
24%
19%
3%
9%
100%
2012
60%
27%
6%
2%
5%
100%
Despite the established payment terms, customers in the oil and gas industry, who represent a significant portion of the
customer base for the Company, typically pay amounts within 60 days of the invoice date. Accordingly, it is management’s
view that amounts outstanding from these customers up to 60 days from the invoice date have a low risk of not being
collected. The increase in overall aging of the accounts receivable relative to the year ended December 31, 2012 is mainly
due to the significant $3,927,000 USD disputed receivable that was settled after the year ending December 31, 2013.
Included in the accounts receivable balance are balances not considered trade receivables of $360,000 which include funds
receivable from various sales tax refunds, insurance refunds and rebates (December 31, 2012 - $1,131,000).
The Company had recorded an allowance for doubtful accounts of $542,000 as at December 31, 2013 (December 31, 2012 -
$275,000). The allowance is an estimate of the December 31, 2013 trade receivable balances that are considered
uncollectible. The allowance increased for bad debt expense of $462,000 (2012 - $110,000), offset by payments of $2,000
(2012 - $110,000), write offs of $209,000 (2012 - $76,000) and a translation adjustment of $16,000 (2012 - $4,000) for the
year ended December 31, 2013.
d) Liquidity risk
The Company’s objective related to liquidity risk is to effectively manage cash flows to minimize the exposure that the
Company will not be able to meet its obligations associated with financial liabilities. On an ongoing basis, liquidity risk is
managed by maintaining adequate cash and cash equivalent balances and appropriately utilizing available lines of credit.
Management believes that forecasted cash flows from operating activities, along with the available lines of credit, will provide
sufficient cash requirements to cover the Company’s forecasted normal operating activities, commitments and budgeted
capital expenditures.
52
Notes to the Consolidated Financial Statements
The Company has pledged as general collateral for advances under the operating credit facility and the bank term loan a
general security agreement on present and future assets, guarantees from each present and future direct and indirect
subsidiary of the Company supported by a first registered security over all present and future assets, and pledge of their
shares. The Company is not permitted to sell or re-pledge significant assets held under collateral without consent from the
lenders.
The following are the undiscounted contractual maturities of financial liabilities excluding future interest:
Carrying
Amount
$
16,998
896
3,736
21,630
(in thousands of dollars)
Accounts payable,
accrued liabilities
and provisions
Dividends payable
Long term debt
Total
22. STATEMENTS OF CASH FLOWS
For the year ended December 31,
(in thousands of dollars)
Net interest paid
Income taxes paid
23. CAPITAL RISK MANAGEMENT
2014
$
2015
$
2016
$
Thereafter
$
15,947
896
1,350
18,193
1,051
—
2,386
3,437
—
—
—
—
2013
$
452
8,922
9,374
—
—
—
—
2012
$
823
4,616
5,439
Management’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern, to
provide an adequate return to shareholders, to meet external capital requirements on the Company’s debt and credit
facilities and preserve financial flexibility in order to benefit from potential opportunities that may arise. The Company
defines capital that it manages as the aggregate of its long term debt and shareholders’ equity, which is comprised of issued
capital, contributed surplus and retained earnings.
a)
Long term debt and adjusted capital employed:
As at December 31,
(in thousands of dollars)
Current portion of long term debt [note 11]
Long term debt [note 11]
Total long term debt
Share capital
Contributed surplus
Retained earnings
Adjusted shareholders’ equity
Adjusted capital employed
2013
$
1,350
2,386
3,736
74,846
2,301
31,419
108,566
112,302
2012
$
1,350
3,412
4,762
70,980
2,609
20,273
93,862
98,624
Management considers changes in economic conditions, risks that impact the consolidated operations and future significant
capital investment opportunities in managing its capital and considers adjustments to its ratio of long term debt to adjusted
53
Notes to the Consolidated Financial Statements
capital employed when significant changes in these factors are expected. Management considers the ratio of long term debt
to adjusted capital employed of 3% as at December 31, 2013 (December 31, 2012 – 5%) to be low. Adjusted capital employed
is defined as long term debt plus total shareholders’ equity excluding accumulated other comprehensive loss.
b) Debt management
Under its long term credit facilities, the Company must maintain a number of financial covenants on a quarterly basis. These
covenants include, but are not limited to, a minimum shareholders’ equity value, a debt to tangible net worth ratio, a fixed
charge coverage ratio and a current ratio. These ratios are calculated in accordance with the credit facility and are not
necessarily consistent with figures presented in these consolidated financial statements under International Financial
Reporting Standards.
The following summarizes the financial ratios mentioned above calculated in accordance with the Company’s credit facility:
Minimum equity value
Debt to tangible net worth
Fixed charge coverage ratio
Current ratio
Dec 31,
2013
Actual
$105 million
0.06
5.8
3.03
Dec 31,
2013
Required
>$50 million
<2.0
>1.5
>1.25
Dec 31,
2012
Actual
$86million
0.10
5.07
2.16
Dec 31,
2012
Required
>$50 million
<2.0
>1.5
>1.25
On an ongoing basis, management expects to continue meeting all financial covenants under its current credit facility.
24. SEGMENTED INFORMATION
Operating segments are defined as components of the Company for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief
operating decision maker of the Company is the Chief Executive Officer. The Company operates substantially all of its
activities in two reportable segments, Underground Fluid Containment (“Underground”) and Aboveground Fluid Containment
(“Aboveground”).
a)
Information about reportable segments
For the year ended December 31,
(in thousands of dollars)
Revenue
Manufacturing and
selling costs
Gross profit
Underground
Aboveground
Total
2013
$
2012
$
2013
$
2012
$
2013
$
2012
$
121,692
114,442
40,012
55,917
161,704
170,359
96,241
25,451
94,019
20,423
31,981
8,031
46,421
9,496
128,222
33,482
140,440
29,919
Manufacturing and selling costs are the only costs that are directly attributable to the Underground and Aboveground
operating segments. All other costs are not specifically identifiable to an individual segment and management has
determined that there is no rational basis on which to allocate general and administration and other expenses. Only a gross
profit measure is reported to the Chief Executive Officer on a regular basis; therefore gross profit is disclosed as the measure
of profit.
54
Notes to the Consolidated Financial Statements
Inventories
Property,
plant and
equipment
Intangible assets
and goodwill
As at
(in thousands of dollars)
Underground
Aboveground
Total
Dec 31,
2013
$
20,874
2,936
23,810
Dec 31,
2012
$
18,908
3,749
22,657
Dec 31,
2013
$
21,197
6,057
27,254
Dec 31,
2012
$
20,265
5,828
26,093
Dec 31,
2013
$
32,735
3,746
36,481
Dec 31,
2012
$
32,092
3,940
36,032
The only assets that can be identified by reportable segments are inventories, property, plant and equipment, intangible
assets and goodwill. All other current and long term assets, as well as current and long term liabilities are not segregated into
the reportable segments.
b)
Information about major customers
The Company has long term contracts and alliance arrangements with many of the major oil and gas companies and
distributors in Canada and provides products for distributors and retail oil and gas companies in the US. For the year ended
December 31, 2013 and 2012, no single customer exceeded 10% of total revenue.
c)
Information about geographic areas
For the years ended December 31,
(in thousands of dollars)
Canada
United States
International
As at
(in thousands of dollars)
Canada
United States
International
2013
$
56,454
102,135
3,115
161,704
Revenues
2012
$
79,317
87,865
3,177
170,359
Property, plant and
equipment, intangible
assets and goodwill
Dec 31,
2013
$
24,825
37,803
1,107
63,735
Dec 31,
2012
$
24,981
35,983
1,161
62,125
Dec 31,
2013
$
54,893
76,562
2,860
134,315
Total assets
Dec 31,
2012
$
54,510
63,233
2,783
120,526
55
Notes to the Consolidated Financial Statements
25. IMPAIRMENT TESTING OF GOODWILL
Goodwill acquired through business combinations has been allocated to three groups of cash-generating units (“CGUs”) as
follows:
• Underground Canada
• Underground US
•
Aboveground
Carrying amount of goodwill allocated to each CGU
As at
(in thousands of dollars)
Goodwill
Underground Canada
Underground US
Aboveground
Oct 1,
2013
$
1,377
Oct 1,
2012
$
1,377
Oct 1,
2013
$
26,536
Oct 1,
2012
$
25,319
Oct 1,
2013
$
2,641
Oct 1,
2012
$
2,641
The Company performed its annual goodwill impairment test as at October 1, 2013. Among other factors, the Company
considers the relationship between the fair values less cost to sell (“FVLCS”) of its CGUs, to their carrying amounts, when
reviewing for indicators of impairment. As at October 1, 2013, the FVLCS of the CGUs were above the carrying amounts,
indicating there was not an impairment of goodwill in any of the CGUs identified above.
The balances relating to goodwill disclosed above are as at October 1, 2013, the date of the impairment test. Goodwill
carried in the Underground US CGU is denominated in US dollars and the carrying amount is subject to fluctuations in the US
dollar to Canadian dollar exchange rate, which is why the October 1, 2013 figures above may differ from the October 1, 2012
carrying amount. There has been no impairment of goodwill recognized in the 2013 or 2012 year.
Key assumptions used in the FVLCS calculations
The calculation of the FVLCS for the three CGUs is most sensitive to the following assumptions:
• Discount rates
• Growth rate used to extrapolate cash flows beyond the budget period
• Gross profit
Discount rates:
Discount rates represent the current market assessment of the risks specific to each CGU, regarding the time value of money
and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The discount rate
calculation is based on the market risks and specific circumstances of the Company and its operating segments and is derived
from its weighted average cost of capital (WACC). The WACC takes into account both debt and equity. The cost of equity is
derived from the expected return on investment by investors. The cost of debt is based on market conditions and the
Company’s interest bearing borrowings. Segment-specific risk is incorporated by applying individual beta factors. The beta
factors are evaluated annually based on publicly available market data. Specific risk premiums are calculated after
consideration for the volatility in the revenue streams and the risk factors affecting the predictability of the particular CGU.
Discount rate ranges utilized by CGUs are as follows: Underground Canada (12.5% to 13.3%), Underground US (14.5% to
15.3%) and Aboveground (24.3% to 25.1%).
Growth rate estimates:
Growth rates for 2013 are established using the board approved budgeted growth rate by CGU. Longer term growth rates are
established using the Strategic Plan for each CGU. Both the 2013 operating budget and the Strategic Plan were calculated
using our current prospects and our planned strategic changes expected to be implemented. The growth rate used to
extrapolate cash flows beyond the budget period used (five years) is based on Government of Canada target inflation rates
and US Federal Reserve long term inflation expectations (2% for all CGUs).
56
Notes to the Consolidated Financial Statements
Gross profit:
Gross profit is based on historical values and is adjusted upwards or downwards depending on expected changes in revenues
and variable costs. As fixed costs remain relatively constant over the short term while revenues increase, gross profits
improve over this same period.
Sensitivity to changes in assumptions
Discount rates:
Most rates used within the WACC calculation do not change significantly year to year; however, if the specific risk premium
were adjusted in either direction, it would have an effect on the FVLCS of the CGU. This, in turn, would change the excess or
deficiency values over the carrying amounts of the CGU. For the Underground Canada CGU, the specific risk premium would
need to increase 11% in the worst case scenario before a deficiency would be created. For the Underground US CGU, the
specific risk premium would need to increase 80% and with the Aboveground CGU, the specific risk premium would need to
increase 43% over the current worst case scenario before a deficiency over the carrying value would be created.
Growth rate and gross profit assumptions:
Sales growth rates used were modest; however, any reduction in the sales growth rate would have a negative impact on the
FVLCS of the overall CGUs. Similarly, gross profits as a percentage of revenues used were in line with historical rates realized
by the CGUs. For the Underground Canada CGU, gross profit would have to fall to 95% of our current expectations; the
Underground US CGU would have to fall to 77%; and the gross profit for the Aboveground CGU would have to fall to 82% of
its current expectations before a deficiency would result in the respective carrying amounts.
As at October 1, 2013, the total recoverable amount of the Company's CGUs exceeded their carrying amounts.
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company holds financial instruments consisting of cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and accrued liabilities, and long term debt.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued
liabilities approximates their fair value due to their short term nature.
The carrying value of long term debt approximates its fair value as changes in interest rates are not expected to significantly
impact the value of the loan. In addition, the interest rates are the market rates at each reporting period.
57
CORPORATE INFORMATION
________________________________________________________________________________
Transfer Agent & Registrar
Valiant Trust Company
3000, 10303 Jasper Avenue
Edmonton, Alberta
Canada T2J 3X6
Auditors
Ernst & Young LLP
2200 Telus House, South Tower
10020 – 100 Street
Edmonton, Alberta
Canada T5J 0N3
General Counsel
Bennett Jones LLP
3200 Telus House, South Tower
10020 – 100 Street
Edmonton, Alberta
Canada T5J 0N3
Stock Listing and Share Symbol
Toronto Stock Exchange: ZCL
Board of Directors
Anthony (Tony) P. Franceschini, Chair of the Board
Ronald M. Bachmeier, President, CEO, Director
D. Bruce Bentley, Director
Leonard A. Cornez, Director
Allan S. Olson, Director
Harold A. Roozen, Director
Ralph B. Young, Director
Annual General Meeting
1:30 p.m. on Friday, May 9, 2014
at The Edmonton Hotel & Convention Centre
in the Sierra Room
4520 – 76 Ave, NW
Edmonton, Alberta
Canada T6B 0A5
Corporate Office
1420 Parsons Road, SW
Edmonton, Alberta
Canada T6X 1M5
Common Shares Outstanding
As of March 7, 2014
Total outstanding: 29,897,784
Investor Relations
Copies of this Annual Report may be obtained
by calling Investor Relations at (780) 466-6648
or e-mailing IR@zcl.com
58
1420 Parsons Road SW | Edmonton | Alberta | Canada | T6X 1M5
Tel 780.466.6648 Fax 780.466.6126 Toll Free 1.800.661.8265 Web www.zcl.com